Module 1 · Tax Formulas and Credits · Lesson 6 of 10

Gross tax, credits and prepayments

Nonrefundable and refundable credits, withholding and estimated payments.

In this lesson · about 16 minutes

  • Explain how credits and prepayments reduce the gross tax liability
  • Tell refundable credits from nonrefundable credits
  • Recognize the common individual credits and who they help

  7. The total tax owed before any credits or prepayments, such as withholding or estimated payments, are applied.

    Lines 16–18

Gross tax liability is the total tax owed before credits and before anything already paid. Two kinds of items come straight off it, dollar for dollar:

  • Prepayments: federal tax withheld by employers and other payers (W-2 box 2, 1099 box 4) and estimated tax payments sent to the IRS during the year.
  • Tax credits: amounts the law lets qualifying taxpayers subtract from their tax.

Credits come in two kinds, and the difference matters a lot to clients with modest tax bills:

  • Nonrefundable credits can reduce tax to zero, but no further. Any extra is lost (a few can be carried forward).
  • Refundable credits are paid even when they exceed the tax. The extra comes back as part of the refund.
Credit (2025)AmountRefundable?
Child tax creditUp to $2,200 per qualifying child under 17Partly: up to $1,700 per child (the additional child tax credit)
Credit for other dependentsUp to $500 per dependentNo
Earned income tax credit (EITC)Up to $649 (no children) to $8,046 (three or more)Yes
American opportunity creditUp to $2,500 per student, first four years of college40%, up to $1,000
Lifetime learning creditUp to $2,000 per returnNo
Child and dependent care credit20%–35% of up to $3,000 of care costs ($6,000 for two or more)No
Saver's credit10%–50% of up to $2,000 of retirement contributionsNo

Most credits shrink or disappear as income rises. The phase-outs are measured using AGI or a modified AGI.

Worked example

Dana, head of household with two children

Dana is a single parent with two children, ages 6 and 9. She earned $48,000 in wages and had $1,900 withheld. No adjustments.

    Step 0 of 9

    Calculator

    Credit waterfall

    See how nonrefundable credits, refundable credits and prepayments are applied in order.

    $
    $

    Used for the refundable part of the child tax credit.

    $

    Education, dependent care, saver's credit…

    $

    EITC, refundable part of the American opportunity credit…

    $
    Gross tax liability$2,585.00
    Child tax credit (nonrefundable part)2 × $2,200 = $4,400 available$2,585.00
    Other nonrefundable credits$0.00
    Tax after nonrefundable credits$0.00
    Additional child tax credit (refundable)Smallest of unused $1,815, $3,400 cap, 15% of earnings over $2,500.$1,815.00
    Other refundable credits$0
    Prepayments$1,900
    Refund$3,715.00

    Federal, tax year 2025, simplified for learning. Not tax advice.

    Sorting drill

    Which kind of credit?

    Sort each credit by whether it can create a refund on its own.

    • Earned income tax credit
    • Lifetime learning credit
    • American opportunity credit
    • Child and dependent care credit
    • Child tax credit
    • Credit for other dependents

    0 of 6 sorted

    Check your understanding0 of 2 correct

    Question 1

    1.A client's tax is $600. They have a $1,000 nonrefundable credit and no withholding. What happens?

    Question 2

    2.Federal tax withheld from a paycheck is best described as…

    Quiz score: 0 of 2

    Tip: answer every quiz question correctly first.

    For learning only, not tax advice. Figures are federal for tax year 2025 and simplified; phase-outs and special rules are not all shown. Check current IRS instructions before preparing a return.