- Tax credits directly lower your tax bill, making them more valuable than tax deductions.
- Some tax credits are refundable or can be carried forward to future years.
- You can get tax credits for caretaking, education, and retirement savings, although eligibility varies.
Claiming tax credits is one way to pay less income tax. While a lot of people focus on tax deductions as a way to shrink their tax bill, credits can be more valuable because they directly reduce how much you owe. It's like using a gift card at a clothing store. And in some cases, a credit ends up as cash in your pocket.
What is a tax credit?
A tax credit is an amount of money authorized by the U.S. Tax Code that reduces your tax liability dollar for dollar. It is one of the last steps in calculating your annual tax bill and can be claimed regardless of whether you itemize your deductions or take the standard deduction.
How tax credits work
Credits are subtracted from your total tax bill. Say your total tax bill is $4,000 and you claim a credit worth $2,000 — you will only be responsible for paying $2,000 in taxes.
Some tax credits are refundable, meaning if you don't have a tax bill large enough to use the full credit, you will get the remainder as a refund. Other tax credits are partially refundable, meaning you can get up to a certain amount of money back as a refund and potentially carry forward any excess into future years. There are nonrefundable tax credits too, which don't return leftover money to the taxpayer if their bill is reduced to $0.
Types of tax credits
Here are a few of the tax credits available to U.S. taxpayers:
Family and dependent credits
The adoption credit is available to taxpayers who incur expenses related to the adoption of a person under age 18 or physically or mentally incapable of self-care. The maximum credit for 2024 is $16,810 per child. While it's technically nonrefundable, any unused credit can be carried forward and applied to tax bills over the next five years.
The credit is available for the adoption of a special needs child even if the taxpayer did not have any qualifying adoption expenses. If your employer provides adoption benefits, you can exclude the income from your taxes if your employer has a written qualified adoption assistance program. You may claim either the adoption credit or the income exclusion.
Eligibility is based on modified adjusted gross income, or MAGI. To get the full credit, you need to have MAGI below $252,150 for 2024. A reduced credit is allowed for filers with a MAGI above that before completely phasing out at a MAGI of $292,150.
The child tax credit (CTC) is a popular credit for parents and caretakers. For 2024, the child tax credit is $2,000 for every dependent age 16 and younger. To qualify for the full credit, married couples filing jointly must have MAGI of no more than $400,000. For all others, the income threshold is $200,000. The credit — which is refundable up to $1,700 — begins to phase out by $50 for every $1,000 over the income thresholds.
Education credits
The lifetime learning credit (LLC) provides a credit of up to 20% of the first $10,000 of qualified costs related to undergraduate, graduate, and professional degree courses. The maximum credit amount is $2,000. For tax year 2024, the amount of the credit is gradually reduced if your MAGI is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return). Taxpayers whose income exceeds those upper thresholds aren't eligible.
The American opportunity credit (AOTC) gives students or parents who claim their student as a dependent up to $2,500 per student in education expenses during the first four years of college. Up to 40% of the credit is refundable, up to $1,000 per student. The AOTC is calculated as 100% of the first $2,000 of qualified expenses plus 25% of the next $2,000 of expenses.
The AOTC is reduced when MAGI exceeds $80,000 for single filers, $160,000 for married, joint filers, and $80,000 for all other filers. Taxpayers with a MAGI above $90,000, or $180,000 for joint filers — and those married but filing separately — cannot claim any of the tax credit.
Quick tip: The education tax credits cannot be claimed at the same time. Use this IRS tool to find out which one will give you the biggest benefit, or consult a tax professional.
Energy credits
The residential clean energy credit is worth 30% of the costs of installing new, qualified clean energy property at your main home in the U.S. That includes things like solar panels, solar water heaters, wind turbines, geothermal heat pumps, fuel cells, and battery storage technology. While the credit is nonrefundable, unused amounts can be carried forward to future years.
The energy efficient home improvement credit is also worth 30%, but applies to new, qualified energy improvements to an existing home. You can claim up to $1,200 for energy property costs with a $250 limit per door ($500 total) and a $150 limit for home energy audits. There is a $2,000 credit limit per year for qualified heat pumps and biomass stoves or boilers. The credit is nonrefundable, cannot be carried forward, and is only accessible to owner-occupants (no landlords).
Other credits
The earned income tax credit (EITC) is a refundable tax credit for Americans with earned income, such as wages, salary, gig economy work, or self-employment income. To qualify for the 2024 tax year, you must have an AGI between $18,591 and $59,899 if you have a filing status of single, head of household, or widowed. Married filers must have an AGI between $25,511 and $66,819. The minimum credit is $632 and the maximum credit is $7,830. The more qualifying children a person claims, up to three, the higher the credit will be.
The premium tax credit is meant to help offset the cost of health insurance purchased through the government-run Health Insurance Marketplace. It's available to families whose income is equal to at least 100%, but not more than 400%, of the federal poverty line. There are two exceptions for taxpayers with income below 100% of the federal poverty line. Generally, individuals who are married and file a separate tax return are not eligible for the credit.
The saver's credit is worth up to $1,000 ($2,000 for married couples who file taxes jointly) and is available to workers who contribute to a traditional IRA, 401(k), or other workplace retirement plan, as well as beneficiaries of ABLE accounts. To get the maximum credit, your AGI cannot be more than $23,000 as a single filer, $34,500 as a head of household filer, or $46,000 as a married joint filer.
Eligibility requirements
As noted above, the eligibility requirements for each tax credit vary. The income measure in most cases is AGI or modified AGI. This amount will never be more than your gross income, which is the total amount earned from things like wages, investment interest, rental income, or pensions.
Your gross income minus your above-the-line deductions — things like student loan interest and retirement contributions — equals your AGI. From there, subtract either your standard deduction or your itemized deductions from your AGI (whichever is larger) and you're left with your taxable income. After applying that amount to the tax brackets, you're left with your tax bill, to which credits can be applied.
FAQs about tax credits
To claim a tax credit, you must claim it on the relevant forms and schedules and submit it alongside your tax return.
Yes, you can claim multiple tax credits if you qualify. The only two credits that cannot be claimed in the same year are the American Opportunity Tax Credit and the Lifetime Learning Credit.
The difference between a tax credit and a tax deduction is that a deduction reduces the amount of income that's taxable. A tax credit directly reduces what you owe after your tax bill has been calculated and may even result in a refund.
