What is categorized as a nonrefundable tax credit?

A nonrefundable tax credit is a type of tax benefit that can reduce your tax liability to zero but cannot result in a refund for any excess. In the context of the options provided, the tax credit for the first $2,000 of contributions to a plan is classified as a nonrefundable tax credit because it directly reduces the dollar amount of taxes owed based on the eligible contributions made. If the amount of the tax credit exceeds the tax liability, the excess is not refunded to the taxpayer.

In the case of this specific tax credit, it incentivizes contributions to retirement plans by providing a direct benefit tied to the amount contributed, capped at a certain limit. Therefore, it aligns with the characteristics of a nonrefundable credit, as it serves to reduce tax liability but does not provide any additional refund benefits beyond that.

Other options do not fit the definition of a nonrefundable tax credit in this context, as they either pertain to different forms of refunds or tax benefits which may have refundable features or are not categorized as tax credits at all.