What a Tax Credit Is
A tax credit is a dollar-for-dollar reduction in the taxes 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 that gets taxed—a deduction saves you money only on the percentage you would have paid in tax, but a credit saves you the full amount.
Tax credits come from the federal government and sometimes from your state. They exist because Congress wants to encourage certain behaviors or help certain groups of people—parents with children, people who buy electric vehicles, students paying for college, or workers with low incomes. The IRS publishes the list of available credits each year, and you claim them on your tax return.
Key Takeaways
- A tax credit reduces your tax bill dollar-for-dollar, while a tax deduction only reduces the income that gets taxed.
- Some credits are refundable, meaning you can get money back even if you owe no tax; others are non-refundable and can only reduce what you owe to zero.
- You claim tax credits on your federal tax return (Form 1040) or your state return, depending on which credits you are using.
- Common credits include the Child Tax Credit, Earned Income Tax Credit, American Opportunity Credit for students, and credits for energy-efficient home improvements.
Refundable vs. Non-Refundable Credits
The difference between these two types matters when your credit is larger than what you owe. A refundable credit can give you money back. If you owe $300 in tax and you have a $500 refundable credit, the IRS sends you $200. The Earned Income Tax Credit and the Child Tax Credit (up to a certain amount per child) are refundable.
A non-refundable credit can only reduce your tax bill to zero—it cannot give you a refund. If you owe $300 and you have a $500 non-refundable credit, your bill becomes zero, but you do not get the extra $200. The American Opportunity Credit for college expenses and the Lifetime Learning Credit are non-refundable, though the American Opportunity Credit has a partially refundable portion.
When you file your return, the IRS applies non-refundable credits first, then refundable credits. This order matters if you have both types and your total credits exceed what you owe.
Common Tax Credits You May Encounter
The Child Tax Credit gives you up to $2,000 per child under age 17 if your income is below certain thresholds. The amount phases out as your income rises, and the credit is partially refundable—you can receive up to $1,700 per child as a refund even if you owe no tax.
The Earned Income Tax Credit (EITC) is for workers with low to moderate income. The amount depends on your income, filing status, and number of children. It is fully refundable, so many people who claim it receive a refund even though no tax was taken from their paychecks.
The American Opportunity Credit helps pay for college tuition and fees—up to $2,500 per student per year. You can claim it for up to four years per student. Up to $1,000 of this credit is refundable.
The Lifetime Learning Credit also covers college costs but has different rules: up to $2,000 per return (not per student), no limit on how many years you can claim it, and it is non-refundable. You cannot claim both the American Opportunity Credit and the Lifetime Learning Credit for the same student in the same year.
Energy credits reward you for making your home more efficient—installing solar panels, upgrading insulation, replacing windows, or buying an electric vehicle. These vary by state and change year to year as Congress updates the rules.
How to Claim a Tax Credit on Your Return
You claim federal tax credits on Form 1040 (the main federal income tax form) or on a supporting schedule that attaches to it. Different credits use different forms. The Child Tax Credit and EITC go on Schedule 8812. Education credits use Form 8863. Energy credits use Form 3468 or Form 5695, depending on the type.
If you use tax software (like TurboTax, H&R Block, or the IRS Free File program), the software asks you questions about your situation and automatically fills in the right forms and schedules. If you file by hand or with a tax preparer, you need to know which credits you may have access to for and which forms to include.
State tax credits work the same way but go on your state tax return. Not every state offers the same credits as the federal government. Some states have their own child tax credits, education credits, or energy credits. Check your state's tax agency website to see what is available.
Income Limits and Phase-Outs
Many tax credits shrink or disappear as your income rises. The Child Tax Credit, for example, reduces by $50 for every $1,000 (or fraction thereof) of income above $400,000 if you are married filing jointly, or $200,000 if you are single. The EITC phases out at different income levels depending on your filing status and number of children.
When you file your return, you report your income, and the IRS calculates whether you are below the income limit for each credit you claim. If you are above the limit, the credit shrinks or disappears. This is automatic—you do not have to do anything except report your actual income accurately.
Tax Credits vs. Tax Deductions
The confusion between credits and deductions trips up many people. A tax deduction reduces your taxable income. If you earn $60,000 and take a $10,000 deduction, you pay tax on $50,000 instead. How much you save depends on your tax rate—if you are in the 22% 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. This is why credits are almost always more valuable than deductions of the same dollar amount. The only exception is when a credit is non-refundable and you do not owe enough tax to use it all.
Common deductions include the standard deduction (a flat amount everyone can take), mortgage interest, charitable donations, and state and local taxes (up to $10,000). You can take either the standard deduction or itemize deductions, but not both. Tax credits, by contrast, are separate—you can claim credits whether you take the standard deduction or itemize.
Frequently Asked Questions
Can I claim more than one tax credit on the same return?
Yes. You can claim multiple credits in the same year as long as they do not explore to the same expense. For example, you cannot claim both the American Opportunity Credit and the Lifetime Learning Credit for the same student in the same year, but you can claim the Child Tax Credit and the EITC on the same return if you meet the requirements for both.
What happens if my tax credit is bigger than the tax I owe?
If the credit is refundable, you get the difference back as a refund. If it is non-refundable, your tax bill goes to zero and you lose the unused portion of the credit. Some credits are partially refundable, meaning part of the credit can be refunded and part cannot.
Do I have to file a tax return to claim a tax credit?
For refundable credits like the EITC and the refundable portion of the Child Tax Credit, yes—you must file a return to receive the refund. For non-refundable credits, you only need to file if you owe tax or want to claim the credit. However, filing is usually worth it if you are may have access to to a refund.
Can I claim a tax credit if I did not work or earn income?
It depends on the credit. The EITC requires earned income (wages or self-employment income). The Child Tax Credit does not require you to work. Some education credits require you to have paid education expenses. Check the specific requirements for each credit you think you might may have access to for.
Do state tax credits work the same way as federal credits?
Generally yes, but the amounts, income limits, and rules vary by state. Some states offer credits the federal government does not, and some states do not offer credits the federal government does. You claim state credits on your state tax return, separate from your federal return. Check your state's tax agency website for the credits available to you.