A tax credit reduces the amount of tax you owe to the government, dollar for dollar

A tax credit is different from a tax deduction. A deduction lowers your taxable income. A credit lowers your actual tax bill. If you owe $2,000 in taxes and you have a $500 credit, you now owe $1,500. If the credit is larger than what you owe, some credits will send you money back — these are called refundable credits.

Tax credits exist for specific situations: having children, paying for childcare, going to school, making your home more energy-efficient, or earning a low income. Each credit has its own rules about who can claim it and how much it's worth. The value of a credit does not change based on your tax bracket the way a deduction does — $1 of credit is always $1 off your bill.

Key Takeaways

  • A tax credit subtracts directly from the tax you owe, while a deduction reduces the income that gets taxed.
  • Refundable credits can result in a refund if the credit is larger than your tax bill; non-refundable credits can only reduce what you owe to zero.
  • Each credit has specific income limits, household composition requirements, or other conditions you must meet to claim it.
  • You claim tax credits on your tax return, and the IRS verifies your information when they process your return.
  • Some credits phase out as your income rises, meaning the amount you can claim decreases or disappears at higher earnings levels.

Refundable versus non-refundable credits

A refundable credit can reduce your tax bill below zero, and the IRS will send you the difference as a refund. The Earned Income Tax Credit (EITC) and the Additional Child Tax Credit are refundable. If you owe $800 in taxes and you have a $1,200 refundable credit, you will receive $400.

A non-refundable credit can only reduce your tax bill to zero — it cannot create a refund. The Lifetime Learning Credit and the Adoption Credit are non-refundable. If you owe $800 and you have a $1,200 non-refundable credit, you pay nothing, but you do not receive the extra $400.

Some credits are partially refundable, meaning a portion of the credit can result in a refund but the rest cannot. The Child Tax Credit, for example, is non-refundable up to a certain amount, but a portion of it (the Additional Child Tax Credit) is refundable.

Common tax credits and who they are for

The Earned Income Tax Credit (EITC) is for people with low to moderate income who work. The amount depends on your income, filing status, and number of children. It is refundable, so many people who claim it receive money back even if they owe no tax.

The Child Tax Credit is $2,000 per child under age 17 (this amount can change year to year). You must claim the child as a dependent, and the credit phases out if your income is above a certain level. Part of this credit is refundable.

The Child and Dependent Care Credit helps pay for childcare or adult dependent care so you can work or look for work. The credit covers a percentage of what you paid, up to a limit, and the percentage depends on your income.

The American Opportunity Credit and Lifetime Learning Credit are for education expenses. 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 non-refundable.

The Saver's Credit (Retirement Savings Contributions Credit) is for people with low to moderate income who save money in a retirement account. The credit is a percentage of what you contributed.

Income limits and phase-outs

Most tax credits have income limits. If your income is above the limit, you cannot claim the credit. Some credits phase out, meaning the amount you can claim shrinks as your income rises, rather than disappearing all at once.

For example, the EITC phases out gradually. At lower incomes, you get the full credit. As your income increases, the credit amount decreases. Once your income reaches a certain point, the credit is zero. The income level where the phase-out starts and ends depends on your filing status and number of children.

Income limits and phase-out ranges change each year because they are adjusted for inflation. When you file your tax return, you use the limits that apply to the year you are reporting income for, not the current year.

How to claim a tax credit on your return

You claim tax credits on the tax return you file with the IRS. If you file on paper, you fill out the specific form or schedule for each credit you are claiming. If you use tax software or a tax preparer, you answer questions about your situation and the software or preparer calculates which credits you can claim.

To claim a credit, you need to have the required documents or information ready. For the Child Tax Credit, you need your child's Social Security number. For education credits, you need Form 1098-T from the school showing what you paid. For the EITC, you need proof of income and information about any children you are claiming.

The IRS reviews your return after you file. If you claimed a credit and the IRS finds an error or determines you did not meet the requirements, they will contact you. They may reduce the credit, deny it, or ask you to repay it. Keeping records of what you spent or earned helps you if the IRS has questions.

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

If you claim a credit by mistake — for example, because your income was higher than you thought — the IRS will catch it when they process your return. They will adjust your refund or bill you for the amount you overclaimed.

If the IRS determines you claimed a credit you knew you were not may have access to to, they may impose penalties on top of asking you to repay the money. Penalties can be 20 percent or more of the underpaid tax. If the error was unintentional and you have a reasonable explanation, you may be able to avoid the penalty, but you will still owe the money back.

The best protection is to keep records of income, expenses, and dependents, and to answer the questions on your tax return honestly based on what actually happened during the year.

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 might claim both the Child Tax Credit and the Child and Dependent Care Credit in the same year. The IRS will calculate the total credit you are may have access to to and apply it to your tax bill.

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

A deduction reduces the income that gets taxed. A credit reduces the tax itself. A $1,000 deduction saves you money based on your tax bracket (maybe $200 if you are in the 20 percent bracket). A $1,000 credit always saves you $1,000. Credits are generally more valuable.

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

Yes, you must file a return to claim a tax credit. Even if you do not owe tax, you may want to file to claim a refundable credit like the EITC, which can send you money back. If you do not file, you cannot claim the credit.

What if my income changes during the year?

You claim credits based on your actual income for the entire year. If your income was lower than you expected when you filed, you may have overclaimed a credit and will owe money back. If your income was higher, you may have underclaimed. You can file an amended return (Form 1040-X) to correct either situation.

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 dependent to be your child, stepchild, foster child, sibling, or descendant of one of those. The Child and Dependent Care Credit can cover care for any dependent or may have access to person. Read the rules for the specific credit you want to claim.