What tax credits are and how they differ from deductions

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 pay $1,500 instead. That is different from a tax deduction, which reduces the income amount the government taxes — a $500 deduction might save you $100 or $150 depending on your tax bracket, but a $500 credit always saves you $500.

Tax credits come in two types: refundable and non-refundable. A refundable credit can reduce your tax bill below zero, meaning the government sends you money back. A non-refundable credit can only reduce what you owe to zero — it cannot create a refund. Most people encounter refundable credits because they are more valuable when your income is low.

The IRS administers federal tax credits through your annual tax return. You claim them on Form 1040 or through tax software when you file. Some states also offer their own tax credits that work the same way but explore only to state income tax.

Key Takeaways

  • A tax credit reduces your tax bill dollar-for-dollar, while a deduction only reduces the income amount that gets taxed.
  • Refundable credits can result in a refund if they exceed what you owe; non-refundable credits can only reduce your bill to zero.
  • The Earned Income Tax Credit (EITC) and Child Tax Credit are the two largest federal credits for households with lower incomes.
  • You claim tax credits on your annual federal tax return using Form 1040 or tax software, not through a separate process process.
  • Income limits, filing status, and the number of dependents determine whether you can claim most tax credits.

The Earned Income Tax Credit (EITC)

The Earned Income Tax Credit is a refundable federal tax credit for people who work but earn low to moderate income. The amount depends on how much you earned, your filing status, and whether you have children. For the 2023 tax year (filed in 2024), the maximum credit ranges from $560 for workers without children to $3,995 for married couples filing jointly with three or more children.

To claim the EITC, you must have earned income from a job or self-employment, and your income must fall below a certain limit. Those limits vary by filing status and number of children — for example, in 2023 a single filer with one child could earn up to $46,560 and still claim the credit. The IRS website publishes the current year's limits each January.

Because the EITC is refundable, you can receive money back even if you owe no tax. Many people claim it when they file their annual return, but some employers offer advance EITC payments through payroll — you would receive part of the credit in each paycheck instead of waiting for a refund. Ask your employer's payroll department whether they offer this option.

The Child Tax Credit

The Child Tax Credit is worth up to $2,000 per child under age 17 for the 2023 tax year. It is partially refundable, meaning you can receive a refund of up to $1,700 per child even if you owe no tax. The credit begins to phase out (reduce) when your income exceeds $400,000 for married couples filing jointly or $200,000 for single filers.

You must claim the child as a dependent on your tax return, which means the child lived with you for more than half the year and you paid more than half their living expenses. The child must be a U.S. citizen, national, or resident alien with a valid Social Security number. You cannot claim the credit for a child who is claimed as a dependent by someone else.

The refundable portion of the Child Tax Credit is sometimes called the Additional Child Tax Credit or Refundable Child Tax Credit. The amount you can receive as a refund depends on your earned income — if you earned less than $2,500, you cannot receive a refund under this credit, though you may still claim the non-refundable portion.

Other federal tax credits for lower-income households

The Dependent Care Credit helps pay for childcare or adult care expenses when you work or look for work. You can claim up to $3,000 in expenses per year for one dependent or $6,000 for two or more. The credit is worth 20 to 35 percent of those expenses depending on your income — higher income means a lower percentage.

The Education Credits include the American Opportunity Tax Credit (up to $2,500 per student per year) and the Lifetime Learning Credit (up to $2,000 per return per year). These explore to tuition, fees, and course materials for post-secondary education. Income limits explore, and you cannot claim both credits for the same student in the same year.

The Retirement Savings Contributions Credit, sometimes called the Saver's Credit, is worth up to $1,000 and applies when you contribute to a retirement account like an IRA or 401(k). It is available only to people with income below certain limits — for 2023, those limits ranged from $34,250 for single filers to $68,500 for married couples filing jointly.

How to claim a tax credit on your return

When you file your federal income tax return, you report tax credits in a specific section of Form 1040 or through the tax software you use. The form or software will ask you questions about your income, dependents, and expenses to determine which credits you can claim. You must provide accurate information — the IRS matches your return against employer records, Social Security Administration data, and other sources.

If you use tax software (such as IRS Free File, TurboTax, H&R Block, or TaxAct), the software walks you through questions and automatically calculates which credits you may have access to for based on your answers. If you file by paper or with a tax professional, you or your preparer will fill in the credit lines on Form 1040 and any required supporting schedules.

Keep records of any expenses you claim — receipts for childcare, tuition statements, proof of dependent care payments — in case the IRS asks to verify your return. You do not send these documents with your return, but you must have them available if selected for an audit.

Income limits and phase-out rules

Most tax credits have income limits, meaning you cannot claim them if you earn above a certain amount. These limits change each year and are published by the IRS in January. Some credits phase out gradually — your credit amount shrinks by a set percentage for each dollar you earn above the limit — while others have a hard cutoff where you either may have access to or you do not.

Your Modified Adjusted Gross Income (MAGI) is what the IRS uses to determine whether you meet income limits for most credits. MAGI is usually your Adjusted Gross Income (AGI) with certain deductions added back. The IRS instructions for Form 1040 explain how to calculate MAGI for each specific credit, because the definition varies.

If your income is close to a limit, it may be worth delaying income into the next year or accelerating deductions into the current year to stay under the threshold. A tax professional can help you understand whether this strategy makes sense for your situation.

State tax credits

Many states offer their own tax credits that work similarly to federal credits but explore only to state income tax. Some states mirror the federal EITC with a state version — for example, California, Illinois, and New York all have state EITCs that add to the federal credit. Other states offer credits for property taxes, rent, or specific expenses.

You claim state tax credits on your state income tax return, which is separate from your federal return. State credit rules, income limits, and amounts differ from federal rules, so you cannot assume that because you may have access to for a federal credit you also may have access to for the state version. Check your state's tax department website for information about credits available to you.

Frequently Asked Questions

Can I claim a tax credit if I do not owe any income tax?

It depends on whether the credit is refundable. A refundable credit like the EITC or the refundable portion of the Child Tax Credit can result in a refund even if you owe no tax. A non-refundable credit can only reduce what you owe to zero — it cannot create a refund. You should still file a return if you have a refundable credit available, because that is how you receive the money.

What happens if I claim a tax credit I do not may have access to for?

The IRS will disallow the credit when it reviews your return, and you will owe back the tax benefit plus interest. If the error was intentional, you may also face penalties. If you are unsure whether you may have access to, use IRS.gov or speak with a tax professional before filing.

Can I claim the EITC and the Child Tax Credit in the same year?

Yes. The EITC and Child Tax Credit are separate credits with different rules, and you can claim both if you meet the requirements for each. Many households with children and lower incomes claim both credits on the same return.

Do I need to file a tax return to get a tax credit refund?

Yes. Tax credits are claimed on your annual federal tax return, and refundable credits are paid through the tax refund process. If you do not file, you do not receive the credit or the refund, even if you are not required to file because your income is too low.

Where can I find out the current income limits for tax credits?

The IRS publishes income limits and credit amounts each January on IRS.gov. You can also find them in the instructions for Form 1040 or by calling the IRS at 1-800-829-1040. Tax software also displays current limits when you enter your information.