What a tax credit actually does

A tax credit is a dollar-for-dollar reduction in the income tax you owe. If you owe $2,000 in federal income tax and you have a $500 tax credit, you owe $1,500 instead. This is different from a tax deduction, which reduces the income the IRS counts — a deduction saves you money only at your tax rate, but a credit saves you the full amount.

The IRS offers tax credits for specific situations: having children, paying for childcare, going to school, installing solar panels, or earning below certain income thresholds. Each credit has its own rules about who can claim it and how much it's worth.

Some credits are refundable, meaning if the credit is larger than the tax you owe, the IRS sends you the difference as a refund. Others are non-refundable, meaning they can reduce your tax to zero but not below. A few credits are partially refundable — they work one way up to a point and another way beyond it.

Key Takeaways

  • A tax credit cuts your tax bill dollar-for-dollar, while a deduction only saves you money at your tax rate.
  • Refundable credits can result in a refund if they exceed what you owe; non-refundable credits can only reduce your bill to zero.
  • The IRS limits most credits based on your income, filing status, and the specific situation the credit is meant to address.
  • You claim tax credits on your federal tax return using the appropriate IRS form or schedule for each credit.
  • Some credits phase out as your income rises, meaning you get less of the credit or none at all above a certain income level.

Refundable versus non-refundable credits

A refundable credit works like this: you owe $1,200 in tax, but you have a $1,500 refundable credit. The credit first wipes out your $1,200 tax bill, then the IRS sends you the remaining $300. Common refundable credits include the Earned Income Tax Credit (EITC) and the Additional Child Tax Credit, which is part of the Child Tax Credit.

A non-refundable credit stops at zero. You owe $1,200 in tax and have a $1,500 non-refundable credit. The credit reduces your bill to $0, but you do not receive the extra $300. The American Opportunity Tax Credit (for education) is non-refundable, though up to $1,000 of it can be refundable under certain conditions.

Partially refundable credits split the difference. The Child Tax Credit, for example, is non-refundable up to the amount of tax you owe, but up to $1,700 of it (as of the 2023 tax year) can be refundable if you have three or more may have access to children and meet income requirements.

How income limits affect your credit

Most tax credits have income phase-out ranges. This means the credit shrinks or disappears as your income rises above a set threshold. The threshold and the rate at which the credit phases out depend on the specific credit and your filing status.

For example, the Earned Income Tax Credit has different maximum amounts and phase-out ranges depending on whether you have no children, one child, two children, or three or more children. A single filer with two children might receive the full credit if their income is below $43,000, but the credit begins to shrink above that point and reaches zero around $50,000.

The Child Tax Credit phases out at $400,000 of income for married couples filing jointly and $200,000 for single filers. Once your income exceeds the threshold, the credit reduces by $50 for every $1,000 (or fraction thereof) of income above it.

You need to know your modified adjusted gross income (MAGI) to determine whether you are within the phase-out range. MAGI is usually your adjusted gross income with certain deductions added back in. The IRS instructions for each credit form explain how to calculate MAGI for that specific credit.

How to claim a tax credit on your return

You claim tax credits by filing the correct IRS form or schedule along with your federal tax return. The form depends on which credit you are claiming. The Child Tax Credit uses Schedule 8812; the Earned Income Tax Credit uses Schedule EIC; education credits use Form 8863; and the Saver's Credit uses Form 8880.

When you file, you enter information about the person or situation the credit applies to — for example, your child's Social Security number for the Child Tax Credit, or your tuition payments for an education credit. The form calculates how much of the credit you can claim based on your income and other factors.

If you use tax software, the software typically walks you through questions about your situation and automatically fills in the correct forms. If you file by hand, you can read the forms and instructions from IRS.gov. The instructions for each form explain which lines of your return to reference and how to handle the credit if it is refundable or non-refundable.

Common tax credits and what they cover

The Earned Income Tax Credit (EITC) is a refundable credit for people with low to moderate income who work. The amount depends on your income, filing status, and number of may have access to children. You do not need children to claim it, but the credit is larger if you do.

The Child Tax Credit is worth up to $2,000 per may have access to child under age 17. It is non-refundable, but the Additional Child Tax Credit (part of the same credit) can be refundable up to $1,700 per child if you meet income and other requirements.

The American Opportunity Tax Credit covers up to $2,500 of may have access to education expenses per student per year. Up to $1,000 of it is refundable. The Lifetime Learning Credit covers up to $2,000 of education expenses per return (not per student) and is non-refundable.

The Dependent Care Credit (also called the Child and Dependent Care Credit) covers expenses you pay for childcare or adult dependent care so you can work. It is non-refundable and ranges from 20 to 35 percent of your expenses, depending on your income.

The Saver's Credit (Retirement Savings Contributions Credit) is for people with low to moderate income who contribute to a retirement account. It is non-refundable and worth up to $1,000.

What happens if you claim a credit you are not may have access to to

If you claim a credit and the IRS finds you did not meet the requirements, they will reduce your refund or increase the amount you owe. The IRS matches information on your return — like your child's Social Security number or education expenses — against records from schools and other institutions.

If the error was unintentional, you may owe the credit amount plus interest. If the IRS determines the error was intentional or reckless, you may face a penalty on top of the amount owed. The penalty for claiming a credit you are not may have access to to is typically 20 percent of the underpayment.

The best way to avoid this is to keep records of anything the credit requires — birth certificates or Social Security numbers for children, tuition statements for education credits, childcare invoices for dependent care credits. When you file, make sure the information on your return matches these documents.

Tax credits versus tax deductions

A tax deduction reduces the income the IRS counts, not the tax itself. If you earn $60,000 and take a $10,000 deduction, the IRS counts $50,000 as your income. The tax savings depend on your tax rate — if you are in the 22 percent bracket, a $10,000 deduction saves you $2,200.

A tax credit reduces your tax bill directly. A $2,200 credit saves you $2,200 no matter what your tax rate is. For this reason, a credit is almost always more valuable than a deduction of the same dollar amount.

Some situations let you choose between a credit and a deduction. For education expenses, you can claim either the American Opportunity Credit or the Lifetime Learning Credit, or you can deduct tuition and fees — but not more than one per student per year. The credit is usually worth more, so most people choose the credit.

Frequently Asked Questions

Can I claim more than one tax credit on the same return?

Yes. You can claim multiple credits if you meet the requirements for each one. For example, you can claim the Child Tax Credit and the Earned Income Tax Credit in the same year. However, some credits cannot be combined — you cannot claim both the American Opportunity Credit and the Lifetime Learning Credit for the same student in the same year.

What is the difference between a tax credit and a tax refund?

A tax credit reduces what you owe the IRS. A tax refund is money the IRS sends you because you overpaid your taxes during the year. A refundable tax credit can result in a refund if the credit is larger than your tax bill, but they are not the same thing.

Do I have to file a tax return to claim a tax credit?

Yes, you must file a federal tax return to claim a tax credit, even if you do not normally have to file. Some people with very low income are not required to file, but if they have a refundable credit like the EITC, filing allows them to receive the credit as a refund.

What if my income changes during the year and I no longer meet the income limit?

You claim the credit based on your income for the entire tax year, not on your income at any single point. If your income was below the phase-out threshold for most of the year but rose above it by December, you still calculate the credit using your full-year income and may receive a reduced credit or none at all.

Can I claim a tax credit for a dependent who is not my child?

It depends on the credit. The Child Tax Credit requires the person to be your child, stepchild, foster child, sibling, or descendant of any of these. The Dependent Care Credit can cover care for any may have access to dependent, including an adult parent. Check the specific requirements for each credit.