Tax credits reduce what you owe dollar for dollar, which makes them more valuable than a deduction of the same size. Knowing which ones you’re eligible for is one of the more straightforward ways to lower your tax bill.
Credits versus deductions
A tax deduction reduces your taxable income, which in turn lowers the tax you owe. A tax credit reduces the tax bill itself, directly, dollar for dollar. A $500 deduction saves you some fraction of $500 depending on your tax bracket; a $500 credit saves you the full $500.
Nonrefundable credits
A nonrefundable credit can bring your tax bill to zero but not below it. If you owe $300 and qualify for a $500 credit, you can only use $300 of it. Most federal credits fall into this category, including:
- Foreign tax credits, for taxes already paid on income from foreign stocks, bonds, or funds.
- Child and dependent care credit, for costs paid so you could work or look for work.
- Education tax credits, for qualified higher education expenses.
- Retirement savings credit (the Saver’s Credit), worth up to $1,000, or $2,000 filing jointly, for eligible retirement account contributions, subject to income limits.
- Energy savings credits, for qualifying home efficiency upgrades or electric vehicle purchases.
Refundable credits
A refundable credit can exceed what you owe, and the IRS will send you the difference as a refund. If you owe $300 and qualify for a fully refundable $500 credit, your liability goes to zero and you get a $200 refund. Common examples:
- Earned Income Tax Credit (EITC), for lower-income taxpayers with qualifying children, sized to income and family size.
- Child Tax Credit, worth up to $2,000 per child under 17 for the 2025 tax year, with a refundable portion up to $1,700.
- American Opportunity Tax Credit, up to $2,500 per eligible student for the first four years of higher education, with up to $1,000 refundable if it brings your liability to zero.
- Premium Tax Credit, which helps offset marketplace health insurance premiums based on income and family size.
Worth checking every year
Eligibility rules shift regularly, so a credit you didn’t qualify for in past years might apply now. A tax professional can help you identify which ones actually apply to your situation, and it’s worth the conversation: the difference between missing a credit and claiming it can mean the IRS owes you money instead of the other way around.
Educational only, not tax, legal, or investment advice. Check primary sources and speak with a qualified professional before making financial decisions.
