Which Tax Credits Are Both Nonrefundable and Refundable?

Two federal tax credits are both nonrefundable and refundable: the American Opportunity Tax Credit (AOTC) and the Child Tax Credit (CTC). Each one first reduces your tax bill dollar for dollar like any nonrefundable credit, and then a portion of whatever is left converts into a cash refund. That hybrid structure matters most if you owe little or no federal income tax, because a purely nonrefundable credit would leave the extra value stranded.

How the Hybrid Split Works

Every tax credit sits in one of two camps. A nonrefundable credit stops at zero: if you owe $800 and have a $1,200 nonrefundable credit, your tax drops to zero and the remaining $400 vanishes. A refundable credit keeps going past zero, and the IRS sends you the excess as a refund.¹

A hybrid credit does both in sequence. The full credit first applies against your liability. Once that liability hits zero, a formula written into the statute decides how much of the leftover amount becomes refundable. You always get the tax-reduction benefit first; the refundable piece is a backstop for taxpayers whose bill is too small to absorb the whole credit.

The two credits differ in how that second step is calculated. The AOTC uses a flat statutory percentage. The CTC uses a formula tied to your earned income.

The American Opportunity Tax Credit

The AOTC covers qualified higher education expenses for the first four years of post-secondary school. The maximum credit is $2,500 per eligible student per year, calculated as 100% of the first $2,000 in qualified expenses plus 25% of the next $2,000. You need at least $4,000 in qualifying costs to reach the full amount.²

Qualified expenses include tuition, required fees, and books or supplies needed for a course of study, even if purchased off campus. Room, board, insurance, and transportation do not count.³

The 60/40 Split

Sixty percent of the credit you calculate (up to $1,500) is nonrefundable and reduces your tax. The remaining 40% (up to $1,000) is fully refundable.⁴ A taxpayer who owes nothing can still receive up to $1,000 back from the IRS through the AOTC alone. You report the split on Form 8863.⁵

Income Limits and Student Eligibility

The AOTC phase-out thresholds sit in the tax code and are not adjusted for inflation. The credit begins to shrink once your modified adjusted gross income exceeds $80,000 ($160,000 for married couples filing jointly) and disappears at $90,000 ($180,000 joint).⁶

The student must also:

Be enrolled at least half-time for at least one academic period beginning during the tax year, in a program leading to a degree or recognized credential.
Not have already completed four years of post-secondary education before the tax year started.
Not have claimed the AOTC for more than four prior tax years.
Not have a felony drug conviction for possessing or distributing a controlled substance.²

The school should send Form 1098-T by January 31. You generally need it to claim the credit, but if one never arrives you can still qualify by documenting enrollment at an eligible institution and the expenses you paid.⁶

The Child Tax Credit and Additional Child Tax Credit

The CTC takes a different route to its refundable portion. Rather than a fixed percentage, the refundable amount depends on how much you earned. Congress made the expanded CTC provisions from the Tax Cuts and Jobs Act permanent in 2025 through the FY2025 reconciliation law, so the current credit amounts and income thresholds continue forward.⁷

Two Parts, One Credit

For the 2025 tax year, the maximum CTC is $2,200 per qualifying child under 17 with a valid Social Security number. The nonrefundable part applies first, reducing your tax toward zero.⁸

Any credit left after your bill hits zero may come back through the Additional Child Tax Credit, the refundable component. The maximum ACTC for 2025 is $1,700 per qualifying child. The refundable amount equals 15% of your earned income above $2,500, up to that per-child cap.⁹ A taxpayer with very low earnings receives a smaller refundable amount; someone earning around $15,000 or more generally reaches the full ACTC cap. You calculate both halves on Schedule 8812.⁸

The IRS had not published 2026-specific CTC figures at the time of writing, but these amounts are adjusted annually for inflation and will likely sit close to the 2025 numbers.

Income Phase-Out

The CTC starts to phase out at $200,000 in adjusted gross income for single filers and $400,000 for married couples filing jointly, dropping $50 for every $1,000 above those thresholds.⁷ Those ceilings sit well above the AOTC’s, so middle-income families often qualify for the full CTC even when the AOTC has already started to shrink for them.

How This Differs From the EITC

The Earned Income Tax Credit often gets grouped with these two, but it is not hybrid. The EITC is fully refundable from the first dollar: no nonrefundable step, no split. If you qualify for $3,000 and owe $500, you get $2,500 back.¹⁰

That difference matters when you plan around a low tax bill. With the AOTC, only 40% of the credit is available as a refund if you owe nothing, so you lose value by design. With the EITC, the entire credit is available regardless of your liability. The trade-off is that the EITC has tighter income ceilings and requires earned income to claim at all.¹

What Happens If You Claim One You Don’t Qualify For

Because these credits can produce cash refunds, the IRS watches them closely, and the consequences of a bad claim go well beyond paying the money back.

A claim the IRS treats as negligent or in disregard of the rules triggers an accuracy-related penalty of 20% on the underpayment.¹¹ A separate 20% penalty applies to the excessive portion of an erroneous refund claim unless you can show reasonable cause.¹²

The IRS can also ban you from claiming the EITC, CTC, ACTC, or AOTC for two years if it finds you acted recklessly, or for ten years if the claim was fraudulent.¹³ After a disallowance, you must file Form 8862 in any later year you want the credit back, showing you now meet every eligibility rule.¹⁴

Records to Keep

For the AOTC, keep Form 1098-T from the school along with receipts for tuition, fees, and course materials. Keep records showing the student was enrolled at least half-time and had not completed four years of post-secondary education. The school’s employer identification number goes on Form 8863 when you file.⁶

For the CTC and ACTC, keep documents that prove the child qualifies. The IRS accepts school records, medical records, daycare records, and letters on official letterhead showing the child’s name, your shared address, and the dates the child lived with you. Documents signed by a relative are not accepted.¹⁵

Most taxpayers never need to show these records. But if a credit is disallowed and you later file Form 8862 to reclaim it, having the paperwork from the start saves considerable time.

1
Internal Revenue Service. Refundable Tax Credits
2
Internal Revenue Service. Education Credits – AOTC and LLC
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Internal Revenue Service. Qualified Education Expenses
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GovInfo. 26 USC 25A – American Opportunity and Lifetime Learning Credits
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Internal Revenue Service. Form 8863 – Education Credits
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Internal Revenue Service. American Opportunity Tax Credit
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Congress.gov. The Child Tax Credit: How It Works and Who Receives It
8
Internal Revenue Service. Schedule 8812 (Form 1040) 2025
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Internal Revenue Service. Child Tax Credit
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Internal Revenue Service. Earned Income Tax Credit
11
Internal Revenue Service. Accuracy-Related Penalty
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Office of the Law Revision Counsel. 26 USC 6676 – Erroneous Claim for Refund or Credit
13
Taxpayer Advocate Service. Erroneously Claiming Tax Credits Could Lead to a Ban
14
Internal Revenue Service. About Form 8862, Information To Claim Certain Credits After Disallowance
15
Internal Revenue Service. Supporting Documents for Dependents (Form 886-H-DEP)