What income tax credits are and how they differ from deductions

An income tax credit reduces the amount of tax you owe to the IRS dollar for dollar. If you owe $2,000 in federal income tax and you have a $1,500 credit, you owe $500. A deduction, by contrast, reduces your taxable income — so a $1,500 deduction might lower your tax bill by $300 or $450 depending on your tax bracket. Credits are worth more.

The IRS offers two types of credits: refundable and nonrefundable. A refundable credit can give you money back even if you owe no tax at all. The Earned Income Tax Credit (EITC) and the Additional Child Tax Credit are refundable — if the credit is larger than your tax bill, the IRS sends you the difference. A nonrefundable credit can only reduce what you owe to zero; it cannot produce a refund.

Which credits you can use depends on your income, filing status, and what you spent money on during the year. The IRS publishes a list of available credits each tax year, and the income limits and credit amounts change annually.

Key Takeaways

  • Income tax credits reduce your tax bill dollar for dollar, making them more valuable than deductions of the same size.
  • Refundable credits can result in a refund if the credit exceeds what you owe; nonrefundable credits can only reduce your bill to zero.
  • Each credit has its own income limits, filing requirements, and rules about what expenses or situations may have access to.
  • You claim credits on your tax return using specific IRS forms and schedules, not when you file or at any other time.
  • The IRS website and your tax software will show which credits you may be able to use based on your situation.

Common credits and who typically uses them

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 whether you have children. In 2024, a single filer with no children could receive up to $600; a married couple filing jointly with three or more children could receive up to $3,995. These amounts change each year, and the IRS adjusts income limits annually.

The Child Tax Credit provides up to $2,000 per child under age 17 if your income is below certain thresholds. Part of this credit is refundable (the Additional Child Tax Credit), which means some families receive money back. The credit phases out as income rises, and the exact amount depends on your filing status and number of children.

The Child and Dependent Care Credit covers expenses you paid for childcare or adult dependent care so you could work or look for work. You can claim up to $3,000 in expenses 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.

The Education Credits — the American Opportunity Credit and the Lifetime Learning Credit — help pay for college tuition and fees. The American Opportunity Credit is worth up to $2,500 per student per year and is partially refundable. The Lifetime Learning Credit is worth up to $2,000 per return and is nonrefundable. You cannot claim both for the same student in the same year.

Income limits and how they affect your may be able to access

Every credit has an income threshold above which you cannot claim it, or above which the credit begins to shrink. The IRS calls this the phase-out range. For example, the EITC has different phase-out ranges depending on your filing status and number of children. A single filer with no children might phase out completely at $17,000 in income, while a married couple with children might not phase out until $60,000 or higher.

Income for these purposes includes wages, self-employment income, interest, dividends, and certain other sources. It does not include Social Security benefits (unless you have substantial other income), child support received, or gifts. The IRS uses your Modified Adjusted Gross Income (MAGI) to determine if you fall within the income range for each credit, and MAGI is calculated differently for different credits.

If your income is above the phase-out range, you cannot claim that credit. If your income falls within the phase-out range, the credit amount shrinks as your income rises. You need to know your expected income for the year to determine which credits you can use.

What documents and information you need to gather

Before you file your tax return, collect documents that prove your income and support the credits you plan to claim. For the EITC, you need your Social Security number, your spouse's if filing jointly, and your children's Social Security numbers and dates of birth. You also need proof of income: W-2 forms from employers, 1099 forms for self-employment or contract work, or other income statements.

For the Child Tax Credit, you need each child's Social Security number and relationship to you. For the Child and Dependent Care Credit, gather receipts or statements from the daycare provider, preschool, or care facility showing the amount you paid and the provider's tax ID number or Social Security number.

For education credits, you need Form 1098-T from the school, which reports may have access to tuition and fees paid. If the school did not send you a 1098-T, contact the financial aid office and request one. Keep receipts for any expenses you paid out of pocket that the school did not report.

Have your filing status decided before you start — married filing jointly, married filing separately, single, or head of household — because some credits are not available to certain filing statuses. Married filing separately, for example, disqualifies you from the EITC and several education credits.

How to claim credits on your tax return

You claim credits by filling out specific IRS forms and schedules and attaching them to your Form 1040. The EITC requires Schedule EIC (or Schedule 8812 if you have the Additional Child Tax Credit). The Child Tax Credit uses Schedule 8812. Education credits use Form 8863. The Child and Dependent Care Credit uses Form 2441.

If you use tax software, the program walks you through questions about your situation and automatically generates the correct forms. If you file by hand, you can read the forms from IRS.gov, fill them out, and mail them with your return. The forms ask for specific information: your income, your children's names and Social Security numbers, the amounts you paid for may have access to expenses, and other details depending on the credit.

You do not claim credits at any point other than when you file your tax return. You cannot claim them when you receive a paycheck, when you pay tuition, or at any other time during the year. The IRS processes credits only when it processes your complete return.

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

If you claim a credit and the IRS determines you did not meet the requirements, the agency will disallow the credit and send you a notice. You will owe the tax you avoided by claiming the credit, plus interest calculated from the original due date. If the IRS finds you claimed a credit you knew you did not may have access to for, you may also owe a penalty.

The IRS matches information on your return against documents filed by employers, schools, and care providers. If you claim the EITC and the IRS finds your income was higher than you reported, or if you claim a child who does not have a valid Social Security number, the agency will catch it. The same applies to education credits — the IRS compares your Form 1098-T against what you reported.

If you receive a notice that a credit was disallowed, you can respond and provide additional documentation if you believe you may have access to. You can also contact a tax professional or the IRS directly to discuss the issue. Ignoring the notice will result in a bill and collection action.

Credits you may not have considered

Beyond the major credits, the IRS offers several smaller ones that explore to specific situations. The Retirement Savings Contributions Credit (Saver's Credit) helps people with low to moderate income who contribute to a retirement account. The credit is worth 10 to 50 percent of your contribution, up to $2,000, depending on your income and filing status.

The Residential Energy Credits cover certain home improvements that increase energy efficiency — solar panels, heat pumps, insulation, and other upgrades. The credit is worth up to 30 percent of the cost and has no income limit, though some improvements have cost caps.

The Adoption Credit helps offset the cost of adopting a child. The credit amount changes each year; in 2024 it was $15,810 per child. You must have paid may have access to adoption expenses and the adoption must be finalized or in process.

These credits are less common than the EITC or Child Tax Credit, but if your situation matches, they can result in significant tax savings. Your tax software or a tax professional can help you identify which credits explore to you.

Frequently Asked Questions

Can I claim the EITC if I am self-employed?

Yes. Self-employment income counts toward the EITC as long as your total income falls within the phase-out range. You must have earned income — the credit is not available if your only income is from investments or other passive sources. Report your self-employment income on Schedule C and your net profit carries forward to your Form 1040.

What if my income changes after I file my return?

If your income was lower than you expected when you filed, you may be able to claim a credit you could not claim before. You can file an amended return using Form 1040-X. If your income was higher, the IRS may reduce or eliminate a credit you claimed. Either way, you should file the amendment as soon as you know your actual income.

Can I claim the Child Tax Credit for a grandchild or niece I support?

Only if you meet specific requirements. The child must live with you for more than half the year, you must provide more than half their financial support, and you must have a valid Social Security number for them. The child must also be your dependent for tax purposes. A grandchild or niece can may have access to, but the relationship and support rules are strict.

Do I lose credits if I have a refund?

No. Credits reduce your tax bill regardless of whether you end up with a refund or owing money. If your credits are larger than your tax bill, a refundable credit will produce a refund. A nonrefundable credit can only reduce your bill to zero; any excess is lost.

What if I do not have a Social Security number for my child?

You cannot claim the Child Tax Credit or the EITC without a valid Social Security number for each child. If your child was born in the United States, explore for a Social Security number through the Social Security Administration. If your child is not a U.S. citizen, you may be able to use an Individual Taxpayer Identification Number (ITIN) instead, depending on the credit.