Oregon Tax Consultants Practice Exam

Which type of credit is not refundable?

1. American Opportunity Credit

2. Lifetime Learning Credit

3. Both credits are refundable

4. Neither credit is refundable

The correct answer is: Lifetime Learning Credit

The Lifetime Learning Credit is accurately identified as a non-refundable credit. This means that it can reduce your tax liability to zero, but if the credit exceeds the amount owed in taxes, the taxpayer cannot receive a refund for the difference. The purpose of the Lifetime Learning Credit is to help offset the cost of higher education expenses, making higher education more accessible, but it does not provide a refund beyond the tax owed. In contrast, the American Opportunity Credit is a refundable credit, meaning that if the credit amount is greater than the tax owed, the taxpayer is eligible for a refund up to a specified limit. Understanding the distinction between refundable and non-refundable credits is crucial in tax planning, as it impacts how individuals can benefit from available credits in relation to their tax situation.