What are tax credits (and how do I get them)?
When you fill out your annual tax return and figure how much you owe Uncle Sam, tax credits are your best friend, as they’re deducted right from the bottom line. Tax credits are matched dollar for dollar against the amount you owe.
Key Points
- There are dozens of tax credits available for families, college students, homeowners, and more.
- Refundable credits allow you to get money back even if you owe no tax.
- Nonrefundable credits can be used to reduce the amount you owe (but only to zero).
There are dozens of tax credits available for individuals and families. They fall into a few general categories:
- Credits for families and dependents (i.e., children and/or a nonworking spouse)
- Education tax credits
- Income and savings tax credits
- Homeowner tax credits
- Electric vehicle tax credits
- Health care tax credits
Here’s an overview. But first, it’s important to note the difference between refundable and nonrefundable tax credits.
Confused about tax credits, tax deductions, and tax refunds? Here’s an overview.
Refundable credits. Some credits—called “refundable credits”—may give you a refund even if you don’t owe any tax for the year.
Nonrefundable credits. If you don’t owe any federal taxes, you don’t get a nonrefundable credit. Or, if you qualify for a $2,000 tax credit, but only owe $1,000 in taxes, you can only claim a credit for the $1,000 you owe. Some tax credits allow you to carry forward any unclaimed amount. So if you owe taxes the next year, you can claim more of that $2,000 credit.
Family and dependent tax credits
Raising a family in this day and age is fiendishly expensive. But sustaining the population across generations is one key to continued economic growth and stability. So, the government does what it can to cushion the financial impact of family life by offering tax credits:
- Child tax credit. Each qualifying child under the age of 17 at the end of 2023 gives you a $2,000 tax credit. The credit begins to phase out if your adjusted gross income (AGI) exceeds $200,000 (or $400,000 for those married filing jointly). Each child must have a Social Security Number, so get that paperwork filed if you haven’t already. This credit is nonrefundable. However, there is a refundable portion of this credit aimed to help low-income families called the additional child tax credit, which is worth up to $1,600 per qualifying child. There’s an IRS worksheet to fill out with your tax return that tells you if you’re eligible.
- Dependent care credit. If you paid expenses for the care of a qualifying person to allow you (and your spouse, if filing jointly) to work or actively look for work, you may be able to claim the child and dependent care credit. A dependent in this case can be a qualifying child under age 13, or your spouse or another adult living with you who was physically or mentally incapable of self-care (if other restrictions are met). The credit is calculated on only the first $3,000 in expenses you paid for the care (or $6,000 for two or more dependents in care). The credit is calculated on a sliding scale up to AGI of $43,000; above $43,000, the credit is 20% of the expenses paid. For example, if your AGI is $100,000 and you paid $6,000 for day care for your three-year-old child, your credit would be $600 ($3,000 expense limit times 20%). This credit is nonrefundable.
- Earned income tax credit. You may be eligible for the earned income tax credit (EITC) if your income is low to moderate; the amount changes if you have children or meet other criteria. There are special rules for military, clergy, and taxpayers with disabilities, and you may not have investment income over $10,300. If your AGI is up to $17,640 (or $24,210 for those married filing jointly) and you have zero qualifying children, your maximum credit is $600 in 2023. The credit maxes out at an AGI of $56,838 ($63,398 married filing jointly) with three qualifying children; the credit under that scenario would be $7,430 in 2023. The EITC is a refundable tax credit.
- Adoption credit. Qualified adoption expenses such as adoption fees, court costs, and traveling expenses are eligible for a tax credit. The maximum credit per adoption in 2023 is $15,950. This credit is nonrefundable, but you can carry forward leftover credit for up to five years. There are income limits for the adoption credit, which begin to phase out at a MAGI of $239,230. Note that adopting your spouse’s child does not qualify for the adoption credit.
Education tax credits
Just as the government sees value in supporting families, it also recognizes (and thus incentivizes) education. There are two types of education credits:
American opportunity tax credit (AOTC). This credit is for qualified education expenses paid for an eligible student during the first four years of higher education. The maximum annual credit is $2,500 per student (calculated as 100% of the first $2,000 of qualified education expenses plus 25% of the next $2,000 in expenses). For example, if your son went to community college and you paid $3,000 for tuition, you would get a $2,250 credit: $2,000 plus 25% of the next $1,000. Your student must meet certain criteria, so check before you claim the credit. (And if you have 529 college savings funds, you can’t use them tax free on a given expense and claim the credit, so strategize carefully. You might decide to pay the first $4,000 in tuition out of pocket before dipping into the 529.)
Education tax credits use a “modified” adjusted gross income (MAGI) that ”adds back” certain foreign housing and foreign earned income deductions and exclusions to your AGI. To claim the full credit, your MAGI must be $80,000 or less ($160,000 or less for those married filing jointly); the credit fully phases out above $90,000 ($180,000 for those married filing jointly). This credit is partially refundable, which means you may get a partial refund even if you owe no tax.
Lifetime learning credit (LLC). This credit covers tuition and related expenses for eligible students enrolled in eligible educational institutions. The credit can be used for undergraduate, graduate, and professional degree courses, including courses to acquire or improve job skills. You may get up to $2,000 with the LLC, per tax return, for an unlimited number of years. It is calculated as 20% of the first $10,000 in expenses that year. To claim the full credit, your MAGI must be $80,000 or less ($160,000 or less for those married filing jointly); the credit fully phases out by MAGI at $90,000 or $180,000 for those married filing jointly. This credit is nonrefundable.
Income and savings credits
Income and savings credits are intended to either incentivize retirement savings among lower-income taxpayers or to balance out certain types of “double taxation.” If you qualify for any of them, fill out the appropriate forms along with your tax return in order to claim the credit:
- Form 8880, credit for qualified retirement savings contributions (the “saver’s credit”). If your income is less than $36,500 ($73,000 for those married filing jointly) and you’re not listed as a dependent on someone else’s tax return (a parent, for example), you may qualify for a tax credit of up to $1,000 for contributions made to an IRA or 401(k) plan.
- Form 1116, foreign tax credit. This is filed for taxes paid to a foreign country on income that is also taxable in the U.S.
- Form 843, excess Social Security and RRTA tax withheld. Social Security taxes you only on income up to a certain level. For the 2023 tax year, it’s $160,200, and for 2024, it jumps to $168,600. But if you had two employers during the year, you might have been overcharged. This credit would serve as a “refund.”
- Form 8801, credit for prior year minimum tax. Were you assessed an alternative minimum tax (AMT) in previous tax years? If so, you may be entitled to a tax credit.
Homeowner credits
The government sees value in home ownership. It also encourages saving energy:
- Mortgage interest credit. This credit (which is not to be confused with the mortgage interest deduction available to anyone who itemizes their taxes) helps lower-income taxpayers own a home. You’ll know if you qualify, as you’ll be issued a qualified Mortgage Credit Certificate (MCC) from your state or local government when you get a new mortgage on your home. Note that if you sell your home within nine years, you may have to repay all or part of this credit. The credits are nonrefundable, although you can carry forward unused portions for as long as three years.
- Residential clean energy tax credit. If you made qualified home improvements, you may be able to take a tax credit of 30% of the cost of those items. Some of the allowed items include improvements using solar electricity, solar water heating, small wind energy, geothermal heat pumps, biomass fuel, and fuel cells. Energy efficiency improvements also make the list, such as insulation, exterior doors, certain roofs, windows, and skylights. Starting with the 2023 tax year, changes to the energy efficiency part of this credit increased the tax credit maximum to as much as $3,200, depending on the items. These credits are nonrefundable, but the residential clean energy tax credit portion carries forward to future years.
Electric vehicle credit
The electric vehicle credit reduces the taxes of people who purchase new qualified plug-in electric or fuel cell electric vehicles (EVs). The max credit is $7,500 for new vehicles if your AGI is no more than $150,000 ($300,000 for married couples filing jointly). The credit is nonrefundable. A used clean vehicle credit becomes available with a maximum of $4,000.
Health care credit
The premium tax credit (PTC) helps eligible taxpayers cover the premiums for health insurance that they have purchased through the Health Insurance Marketplace. An IRS worksheet helps you find out if you are eligible for the credit. This credit is refundable.
The bottom line
Tax credits are the government’s way of nudging taxpayers into making life decisions that are seen as benefiting society at large. A tax credit shouldn’t justify a purchase or other decision that you wouldn’t have already made. But if you were considering it anyway—earning a college degree or buying an electric vehicle, for example—the tax credit may be icing on the cake.
You can also plan to take advantage of tax credits if you have flexibility. If you know you will owe more tax one year, perhaps your budget will allow for the purchase of some energy-efficient windows to give you a credit. And beware: once a tax credit runs its course, your tax burden will likely increase. For example, the child tax credit ends at age 17, so if you have a child turning 18 this year, expect to owe another $2,000 in tax. But if your child enters college in the fall, you can start receiving an education tax credit.
Easy come, easy go.