What a tax credit actually does

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 owe $1,500 instead. This is different from a tax deduction, which reduces your taxable income before the tax is calculated — a credit directly cuts the final bill.

The IRS offers tax credits for specific situations: having dependent children, paying for childcare, going to college, installing solar panels, or earning a low income. Each credit has its own rules about who can claim it and how much it's worth. Some credits are worth a fixed amount; others vary based on your income or expenses.

Tax credits come in two types: refundable and nonrefundable. A refundable credit can reduce your tax bill below zero, which means the IRS sends you the difference as a refund. A nonrefundable credit can only reduce your tax bill to zero — if the credit is larger than what you owe, you lose the extra amount.

Key Takeaways

  • A tax credit directly reduces the amount of tax you owe to the IRS, dollar for dollar, unlike a deduction which reduces your income before tax is calculated.
  • Refundable credits can result in a refund if they exceed your tax bill, while nonrefundable credits can only reduce your bill to zero.
  • You claim tax credits on your federal tax return using specific forms and schedules, and the IRS verifies your may be able to access when processing your return.
  • Some credits phase out as your income rises, meaning you receive less of the credit or none at all if you earn above a certain threshold.

Common tax credits and who can claim them

The Child Tax Credit is worth up to $2,000 per child under age 17 and is refundable up to $1,700 per child. You must have a valid Social Security number for each child and claim them as dependents on your return. Income limits explore: the credit begins to phase out at $400,000 for married couples filing jointly and $200,000 for single filers.

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 number of may have access to children. For 2024, the maximum credit ranges from $600 (no children) to $3,995 (three or more children). You must have earned income from work to claim it.

The American Opportunity Tax Credit covers up to $2,500 of may have access to education expenses per student per year for the first four years of college. It is partially refundable — up to $1,000 can be refunded to you. The student must be enrolled at least half-time in a degree program, and income limits explore.

The Child and Dependent Care Credit reimburses you for childcare expenses that allow you to work. You can claim up to $3,000 in expenses per year, and the credit is worth 20 to 35 percent of that amount depending on your income. The care provider's tax identification number must be reported on your return.

How to claim a tax credit on your return

You claim tax credits by filing a federal tax return, even if you have no tax liability. Most people file using tax software, which walks you through questions about your situation and automatically calculates which credits you may be able to claim. If you file by paper, you complete the main return form (Form 1040) and attach the specific schedules or forms for each credit.

Each credit has its own form or schedule. The Child Tax Credit uses Schedule 8812. The EITC uses Schedule EIC. Education credits use Form 8863. The software or paper instructions tell you which form to use based on the credits you're claiming. You provide documentation like Social Security numbers, proof of education expenses, or childcare provider information.

When you file, the IRS checks whether you meet the requirements for each credit you claimed. If you made a mistake or no longer may have access to, the IRS may reduce or deny the credit. If you received a credit you were not may have access to to, you may owe it back, plus interest and penalties. This is why accuracy matters — keep receipts and documents for at least three years in case the IRS asks questions.

Income limits and phase-outs

Many tax credits are worth less as your income rises, and some disappear entirely above a certain income threshold. This is called a phase-out. The phase-out range and the rate at which the credit shrinks vary by credit and by filing status.

For example, the Child Tax Credit begins to phase out at $400,000 of modified adjusted gross income for married couples filing jointly. For every $1,000 (or fraction thereof) over that threshold, the credit is reduced by $50. So if your income is $401,000, your credit is $50 less than the full amount.

The EITC phase-out is steeper. As your income rises above the threshold, the credit decreases by a percentage of each additional dollar earned. For 2024, the phase-out rate is 15.3 to 21 percent depending on how many children you have. This means the credit can disappear quickly as income increases.

You can find the exact income thresholds and phase-out rates for each credit in the IRS instructions for the relevant form, or by using tax software. Income thresholds change each year, so check the current year's rules before you file.

Refundable versus nonrefundable credits

A refundable credit can reduce your tax bill below zero. If the credit is larger than the tax you owe, the IRS sends you the difference as a refund. The Child Tax Credit is partially refundable (up to $1,700 per child). The EITC is fully refundable. The American Opportunity Tax Credit is partially refundable (up to $1,000).

A nonrefundable credit can only reduce your tax bill to zero. If the credit is larger than what you owe, you lose the unused portion — the IRS does not send it to you. The Child and Dependent Care Credit is nonrefundable. The Lifetime Learning Credit (another education credit) is nonrefundable.

This distinction matters if you owe little or no tax. If you have a large refundable credit, you may receive a refund even though you had no tax liability. If you have only nonrefundable credits, you get no benefit from the unused portion.

What happens if you claim a credit you don't may have access to for

If you claim a credit and the IRS determines you do not meet the requirements, you must repay the credit. The IRS will send you a notice showing the adjustment and the amount you owe. You can respond to the notice if you believe the IRS made an error, but if the IRS is correct, you owe the credit back plus interest.

If the error was unintentional and you repay the credit, you generally do not face penalties. However, if the IRS finds that you intentionally claimed a credit you knew you did not may have access to for, you may face a penalty of 20 to 75 percent of the underpaid tax, depending on the type of error. This is why it's important to understand the rules before you claim a credit.

If you received a refund that included a refundable credit you later found out you did not may have access to for, the IRS will reduce your next refund or send you a bill for the amount. Keep records of your return and the documents you used to support your credits in case you need to explain your claim.

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 can claim both the Child Tax Credit and the EITC in the same year if you have may have access to children and earned income below the EITC threshold. Tax software will calculate all credits you're may have access to to and explore them in the order that benefits you most.

What's the difference between a tax credit and a tax deduction?

A tax credit reduces your tax bill directly. A tax deduction reduces your taxable income before tax is calculated. A $1,000 credit saves you $1,000 in tax. A $1,000 deduction saves you tax equal to your tax rate — if your rate is 22 percent, a $1,000 deduction saves you $220. Credits are generally more valuable.

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

Yes. You must file a federal tax return to claim any tax credit, even if you have no income or no tax liability. Some refundable credits, like the EITC, are only available to people who file. Use tax software or contact a tax preparer if you're unsure whether you need to file.

What if my income changes after I claim a credit?

If your income changes during the year or you discover you earned more than you thought when you file, you may no longer may have access to for a credit or may may have access to for a smaller amount. Report your actual income on your return. If you received an advance payment of a credit (like the advance Child Tax Credit payments some people received), you may owe some back when you file.

Can I claim a 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. Other dependents do not may have access to. The EITC has similar rules. Check the specific requirements for each credit you're considering.