Western Governors University (WGU) ACCT3630 C237 Taxation I Practice Exam

Question: 1 / 435

What occurs to nonrefundable tax credits not utilized in the current year?

They carry forward to the next tax year

They are available as refunds

They are lost and cannot be claimed later

Nonrefundable tax credits are designed to reduce a taxpayer's tax liability only to the extent of their tax owed. If these credits exceed the tax liability for the year in which they are claimed, the excess is not refunded and cannot be applied to future tax years. As a result, any unused portion of nonrefundable credits is effectively lost, meaning they cannot be carried forward or claimed later.

In contrast, refundable tax credits, if unutilized, can result in a refund to the taxpayer, while nonrefundable credits do not provide this benefit. Carrying forward and reducing future taxable income pertain to different types of credits or deductions, particularly those that allow for the excess to be applied in future tax years. Therefore, understanding the nature of nonrefundable credits is essential in tax planning, highlighting the importance of maximizing their use in the year claimed.

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They reduce future taxable income

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