Tax Credits: How They Work, How To Qualify For Them

Tax credits are a powerful way to save money on taxes. Each dollar of a tax credit is subtracted directly from the amount of tax you owe the IRS. And some tax credits are refundable, meaning even if you don’t owe any more tax, the credit is paid out to you as a tax refund. But many tax credits phase out at higher incomes, so it’s crucial to understand if you qualify.

How tax credits work

Tax credits are subtracted directly from the tax you owe, helping you cut down your overall tax bill. Tax deductions also reduce your tax bill, but they do that by lowering your taxable income.

Let’s say you’re a single filer, you make $50,000 in 2025 and you owe $11,000 in taxes:

• If you claim a tax credit of $1,000, your tax bill drops to $10,000.
• If you claim a tax deduction of $1,000, you’d owe taxes on $49,000 of income instead of $50,000, and your tax bill would drop to about $10,780. (These are rough estimates, based on marginal tax rates.)

In other words, credits can mean substantial tax savings.

Types of tax credits

There are three main types of tax credits.

• Nonrefundable tax credits: These credits allow you to use the amount of the credit up to the amount of tax that you owe. So if your tax bill is $1,000, and you qualify for a nonrefundable $1,200 tax credit, you’d only get your taxes reduced to zero. (Your $1,200 tax credit would be capped at $1,000.)

• Refundable tax credits: Refundable tax credits can put cash back in your pocket. If you get a refundable $1,200 credit on a $1,000 tax bill, you’ll receive a payment of $200 for the rest of the credit. In short, you’d get a refund from the IRS.

• Partially refundable tax credits: With partially refundable tax credits, only part of the credit is refundable. For example, if you qualified for a $1,000 credit of which $800 was refundable, and your tax bill was zero, you’d receive $800 from the IRS.

Popular tax credits and how to qualify for them

We detail some of the most popular federal tax credits below. Most of these tax credits include an income phaseout, which means that people above a certain income level will get a partial credit and those above another level won’t qualify for the credit at all. Be sure to check with the IRS or your tax preparer to see if you qualify based on your adjusted gross income. Also, most reputable tax software products will check to see if you qualify for these tax credits.

Tax credits for electric vehicles and renewable energy upgrades

Tax credit for electric vehicles

The federal government offers an incentive, in the form of a tax credit, for buying an electric car. The tax credit is worth up to $7,500 for qualified new cars and up to $4,000 for qualified used cars. The rules around these tax credits can be confusing. Eligibility and the amount of the credit you’ll receive depends on where the car was made, the price of the car, your income and other details. You can look up a car’s eligibility on the U.S. Energy Department’s website.

Note that President Donald Trump’s administration has said it plans to rollback these incentives, so their future is unclear.

Tax credit for residential clean energy upgrades

There’s a tax credit for taxpayers to make home improvements that are considered sustainable and energy efficient, such as solar energy systems. The credit for qualified purchases between 2022 and 2032 is 30 percent of the cost, and will decrease to 26 percent in 2033 and 22 percent in 2034.

The IRS says that qualified expenses include solar electric panels, solar water heaters, wind turbines, geothermal heat pumps, fuel cells and battery storage technology — but they must be bought new, not used. Labor costs for getting these items assembled and installed can also qualify.

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Tax credits related to children and dependents

Child tax credit

If you have a child under age 17 and your modified adjusted gross income is below $400,000 (if married filing jointly) or $200,000 (all other filers), you may be eligible for the child tax credit (CTC) worth up to $2,000.

If your income exceeds those thresholds, the credit amount is cut by $50 for each $1,000 of your income above the threshold.

A portion of the child tax credit — called the additional child tax credit — is refundable and could allow you to get up to $1,700 (of the $2,000 child tax credit) to be paid out as a tax refund. After 2025, the child tax credit is set to drop to a max of $1,000 per child from the current $2,000 amount.

Tax credit for adoption costs

The expenses associated with adopting a child can be high, and the federal government offers credit toward qualifying expenses. These credits are worth up to $16,810 in tax year 2024 and $17,280 in tax year 2025. This credit is nonrefundable, but you can roll over what you don’t use to a future year if your circumstances and tax liability allow it.

In 2024, taxpayers are eligible for the full credit if their modified adjusted gross income is $252,150 or less. The credit is reduced for taxpayers with income from $252,151 to $292,150. The credit is unavailable to taxpayers with income over $292,150.

Child and dependent care credit

If you pay for child or dependent care, then the child and dependent care tax credit could be worth up to $1,050 if you have one child or dependent, and up to $2,100 if you have two or more children or dependents.

Taxpayers can get a credit worth between 20 percent and 35 percent of their childcare expenses on up to $3,000 of expenses for one qualifying person and $6,000 for two or more. The exact amount of the credit you qualify for will depend on your income.

Don’t forget: These must be work-related care expenses — as in, care you paid for because you were working, not because you were on vacation.

Earned income tax credit

The earned income tax credit (EITC) is aimed at low- to moderate-income workers and families. For tax year 2024 (tax returns filed in 2025), the maximum credit amount ranges from $632 for taxpayers with no qualifying children, up to a maximum tax credit of $7,830 for taxpayers with three or more qualifying children.

The EITC is fully refundable, so if you don’t owe any taxes, you’ll still get the full amount of your tax credit as a refund.

Below are the EITC maximum adjusted gross income limits for 2024 (claimed on tax returns filed in 2025). In addition, taxpayers’ investment income must be less than $11,600.

Maximum adjusted gross income to claim the EITC for 2024

Tax credits for saving and investing

Saver’s credit

If you have a modest income (less than $76,500 in 2024 if married filing jointly, $57,375 if filing as head of household or $38,250 if filing single), you may qualify for a tax credit based on how much you contributed to a retirement savings plan, such as a company 401(k) or 403(b), or an IRA.

The saver’s credit ranges from 10 to 50 percent of your contribution. The maximum retirement-account contribution that qualifies for the credit is $2,000 ($4,000 if you’re married filing jointly), according to the IRS. In other words, the maximum credit is $1,000 ($2,000 if married filing jointly). The lower your income, the higher the percentage of your contribution that qualifies for the tax credit.

Tax credits for educational expenses

There are two tax credits for educational expenses, the Lifetime Learning Credit and the American Opportunity Tax Credit, both of which have income-based phaseouts. 

An individual can’t claim both tax credits in the same year, but if two members of your household have educational expenses, you might be able to take both of the credits on a single tax return. (Parents can claim these credits if their dependent is the student with qualifying expenses.)

Lifetime Learning Credit

The Lifetime Learning Credit is worth up to $2,000 per tax return for expenses related to an accredited school for you, your spouse or a dependent — and the education doesn’t have to be tied to seeking a degree. For example, classes to improve job skills qualify. This is a nonrefundable credit. Eligible taxpayers get up to a 20 percent credit on the first $10,000 of qualified education expenses.

To claim the Lifetime Learning Credit, your modified adjusted gross income must be less than $90,000 (for single filers) or $180,000 (married filing jointly).

American Opportunity Tax Credit

If you have educational expenses and fit the income criteria for the American Opportunity Tax Credit, or AOTC, you may qualify for up to $2,500 in tax credits for expenses like tuition, books, supplies and fees accrued while attending your institution.  This credit is for students in their first four years of college.

The AOTC is a partially refundable credit, worth up to a maximum $1,000 refund. The amount of the credit is 100 percent of the first $2,000 of qualified education expenses per student and then 25 percent of the next $2,000 of qualified education expenses paid for that student. The refund portion is calculated as a 40 percent refund of the remaining credit after the credit zeros out a taxpayer’s tax liability.

As with the Lifetime Learning Credit, to claim the American Opportunity Tax Credit, your modified adjusted gross income must be less than $90,000 (for single filers) or $180,000 (married filing jointly).