Federal tax credits reduce the amount of tax you owe to the IRS, dollar for dollar

A federal tax credit is money the IRS subtracts directly from your tax bill. If you owe $2,000 in federal income tax and you have a $1,500 tax credit, you owe $500. This is different from a tax deduction, which only reduces the income the IRS counts—a deduction saves you money based on your tax rate, but a credit saves you the full amount.

Tax credits exist because Congress wants to encourage certain behaviors or help certain groups of people. The IRS publishes the list of available credits each year in Publication 17 and on IRS.gov. Some credits are refundable, meaning if the credit is larger than what you owe, the IRS sends you the difference. Others are non-refundable, meaning they can only reduce your bill to zero—you cannot get money back.

Key Takeaways

  • A tax credit subtracts directly from your tax bill, while a deduction only reduces your taxable income.
  • Refundable credits can result in a refund if they exceed what you owe; non-refundable credits cannot.
  • Common credits include the Earned Income Tax Credit (EITC), Child Tax Credit, and education-related credits like the American Opportunity Credit.
  • You claim tax credits on your federal tax return using the forms and schedules the IRS specifies for each credit.
  • Income limits, filing status, and other requirements vary by credit, and the IRS updates them yearly.

Refundable vs. non-refundable credits

A refundable credit can pay you money even if you do not owe any tax. The Earned Income Tax Credit (EITC) and the Additional Child Tax Credit are the most common refundable credits. If your EITC is $3,200 and you owe zero tax, the IRS sends you $3,200. This is why refundable credits are especially valuable for lower-income households.

A non-refundable credit can only reduce your tax bill to zero. The Lifetime Learning Credit and the Saver's Credit work this way. If you owe $800 in tax and you have a $1,200 non-refundable credit, your bill becomes zero, but you do not receive the extra $400. Some credits are partially refundable, meaning a portion can be refunded and the rest cannot.

Common federal tax credits and who they target

The Earned Income Tax Credit (EITC) is a refundable credit for working people with low to moderate income. The amount depends on your income, filing status, and number of may have access to children. For the 2024 tax year, the maximum credit ranges from $600 for workers without children to $3,995 for those with three or more may have access to children. You must have earned income to claim it.

The Child Tax Credit is worth up to $2,000 per may have access to child under age 17. Part of it is refundable (the Additional Child Tax Credit), so many families receive a refund even if they owe no tax. The credit phases out at higher income levels, and you must provide the child's Social Security number.

Education credits help pay for college costs. The American Opportunity Credit is worth up to $2,500 per student per year for the first four years of college and is partially refundable. The Lifetime Learning Credit is worth up to $2,000 per return (not per student) and is non-refundable. You cannot claim both for the same student in the same year.

The Saver's Credit rewards people who save for retirement through a 401(k), IRA, or similar plan. It is non-refundable and available only to people with lower incomes. The Dependent Care Credit helps pay for childcare or adult care so you can work, and it is non-refundable.

Income limits and other requirements

Every tax credit has income limits, and they change each year. The IRS publishes updated limits in January for the prior tax year. For example, the EITC income limit for a single filer with no children was $17,050 for the 2023 tax year, but it was higher for married filers and those with children. If your income exceeds the limit, you cannot claim that credit.

Beyond income, each credit has its own rules. The Child Tax Credit requires the child to be a U.S. citizen, national, or resident alien and to have a valid Social Security number. Education credits require you to be enrolled at least half-time at an accredited school. The Dependent Care Credit requires you to have paid someone to care for a dependent while you worked.

Your filing status also matters. Some credits are available only to married couples filing jointly or only to single filers. The IRS instructions for each credit spell out these rules, and they are included in the tax forms you file.

How to claim a tax credit on your return

You claim a tax credit by filing a federal tax return, even if you normally would not have to file. You report the credit on the specific form or schedule the IRS requires. For the EITC, you use Schedule EIC. For the Child Tax Credit, you use Schedule 8812. For education credits, you use Form 8863. If you use tax software or hire a tax preparer, they will guide you to the right forms based on your situation.

You must have documentation to support your claim. For the EITC, keep records of your income and proof of any may have access to children. For education credits, keep receipts or statements showing tuition and fees paid. For the Dependent Care Credit, keep records of what you paid and to whom. The IRS does not always ask for this documentation, but you must have it if they do.

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

If the IRS finds that you claimed a credit incorrectly, they will send you a notice asking you to repay it. For non-refundable credits, this usually means a smaller refund or a larger bill. For refundable credits, you may owe money back. The IRS charges interest on unpaid amounts and may assess penalties if the error was due to negligence or fraud.

Some credits, like the EITC, are audited more often than others because they involve more complex rules. Keep your records for at least three years after you file. If you are unsure whether you may have access to for a credit, the IRS Free File program offers free tax preparation help, and many nonprofits offer free tax help through the Volunteer Income Tax information (VITA) program.

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 both the EITC and the Child Tax Credit on the same return. 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 deduction?

A tax credit reduces your tax bill dollar for dollar. A tax deduction reduces the income the IRS counts, so it saves you money based on your tax rate. If you are in the 12% tax bracket, a $1,000 deduction saves you $120. A $1,000 credit saves you $1,000. Credits are almost always more valuable.

Do I have to file a tax return to get a refundable credit?

Yes. Even if you have no tax bill, you must file a return to claim a refundable credit like the EITC or the Additional Child Tax Credit. If you do not file, you do not receive the refund. The IRS does not automatically send it to you.

What if my income changes during the year?

You claim credits based on your total income for the entire year, not what you earned in any single month. If you think your income will be lower than expected, you can ask your employer to adjust your withholding so you take home more pay during the year. When you file your return, you report your actual income and claim the credits you are may have access to to.

Where can I find out which credits I might be may have access to to?

The IRS website has a tool called the Interactive Tax Assistant that asks questions about your situation and tells you which credits may be available. You can also read IRS Publication 17, which lists all credits and their rules. A tax preparer or the VITA program can also review your situation and identify credits you may have missed.