What Is a Nonrefundable Tax Credit? How It Works With the Scholarship Credit

Nonrefundable vs. Refundable Tax Credits

Tax credits come in two main types. A nonrefundable credit can lower your tax bill to zero, and anything left over is not paid back to you. A refundable credit can go further, because any amount above your tax bill can come back to you as a refund. The federal scholarship tax credit is nonrefundable.

How a Nonrefundable Tax Credit Works

Think of your federal income tax as a bill. A credit pays down that bill. Here are three examples using a $1,700 credit, before any other credits:

• Tax bill of $6,000. The credit reduces it to $4,300.
• Tax bill of $1,700. The credit brings it to $0.
• Tax bill of $1,000. The credit brings it to $0, and $700 of the credit is left over. Because the scholarship credit allows a carryforward, that $700 can be used in a future year.

In every case, the credit never pushes the bill below zero. That is the key difference between a nonrefundable credit and a refundable one.

Credit vs. Deduction

A credit is not the same as a deduction. A deduction lowers the income you are taxed on, so its value depends on your tax bracket. A credit lowers the tax itself. For someone in the 24 percent bracket, a $1,700 deduction saves about $408 in tax, while a $1,700 credit can reduce the tax owed by up to $1,700 if the bill is large enough.

How the Scholarship Credit Works

The federal scholarship tax credit starts with gifts made on or after January 1, 2027. Here are the basics:

• Amount. Up to $1,700 for an individual, or up to $3,400 for married couples filing jointly.
• Type of gift. Cash gifts to a qualified SGO. Digital assets do not count.
• Nonrefundable. The credit can reduce your federal income tax to zero but will not create a refund.
• Carryforward. Unused credit can carry forward for up to five years.
• State credits. If a state credit applies to the same gift, it reduces the amount that counts toward the federal limit.
• No double benefit. You cannot claim the credit and a charitable deduction for the same dollars.

• $1,700Cap for an individual filer
• $3,400Cap for married couples filing jointly
• 5 yearsUnused credit carries forward

How to Tell If Your Tax Bill Can Absorb the Credit

Your tax bill is the tax figured on your return before withholding and payments are counted. Your refund or balance due is something different, so do not use it as your starting point. These steps can help you estimate:

1. Find the total tax on your most recent federal return.
2. Adjust for changes you expect in 2027, such as a raise, a new job, or a change in filing status.
3. Subtract other credits you expect to claim, since they also reduce your bill.
4. Compare what is left to the amount you want to give.
5. Choose a gift that fits, or plan to use the carryforward if your gift is larger than your bill.

What Happens to the Leftover Amount

If your credit is larger than your tax bill, the unused part is not lost. It can carry forward for up to five years and be used against your tax in later years. Carryforward credits are used in order, oldest first, before credits from new gifts.

Is a Nonrefundable Credit a Good Fit for You?

A nonrefundable credit works best when you owe enough federal income tax to use it. If your tax bill is small, the carryforward still gives you time to use the credit over several years. If you owe no federal income tax at all, the credit will not reduce anything right away, so speak with a tax professional before you give.

Common Mistakes to Avoid

• Assuming a refund. A nonrefundable credit never creates a refund, so do not count on money coming back to you.
• Confusing your refund with your tax bill. A large refund usually means too much was withheld during the year. It does not mean you owed a large amount of tax.
• Ignoring other credits. Credits for children, education, or energy upgrades can also reduce your bill, which leaves less room for another credit.
• Forgetting the carryforward. If you cannot use the whole credit in one year, track what remains so you can use it later.
• Mixing up credits and deductions. Deductions and credits are figured in different places on your return, and the same dollars cannot count for both when it comes to this credit.

A short conversation with a tax professional before you give can help you avoid these mistakes and choose a gift that matches your tax bill.

Quick Answers

Is the scholarship credit refundable?

No. It can reduce your federal income tax to zero, but it will not create a refund.

Can I use the credit if I owe no federal income tax?

Not right away. A nonrefundable credit only works against tax you owe, though unused credit can carry forward for up to five years.

Does a nonrefundable credit expire?

The scholarship credit can carry forward for up to five years, so any amount you cannot use in that time would be lost.

Learn More About the Scholarship Credit

Understanding nonrefundable credits makes it easier to plan your gift. Read our donor guide to see how the full credit works, and get notified when giving opens for 2027.

This article is general information, not tax advice. Check with a tax professional about your situation.

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