Key takeaways
- Many federal tax credits are designed to provide financial relief for particular circumstances.
- Tax credits reduce your actual tax bill dollar for dollar.
- Some tax credits are partially “refundable”, meaning that if the credit amount exceeds your tax bill, the government will reimburse you.
What’s the best way to reduce the pain in paying taxes? By taking credit where credit is due.
In this case, we mean applying and qualifying for the many federal tax credits that are designed to provide financial relief for particular circumstances—whether you’re trying to save money, go to school, get health coverage, pay for a caretaker or even adopt a child.
The beauty of a tax credit is that it reduces your actual tax bill dollar for dollar, unlike a deduction, which reduces your income and lowers your tax bill only by the tax rate you would have paid on that amount. Moreover, some tax credits are “refundable” to a certain extent, which means the government will actually pay you if the amount of the credit exceeds your tax bill.
Read on to find out what tax credits are available, who’s eligible to claim the credits, and how you could benefit if you qualify. You’ll find links to official Internal Revenue Service (IRS) information about each credit so you can find more details about each one, such as eligibility requirements and application specifics.
Note that many provisions of the tax code do have income caps and phase-outs and other wrinkles that could affect your actual tax liability. Be sure to work with a tax adviser, or use reliable tax software that clearly addresses your situation, especially if you are in the higher income brackets.
8 tax credits that can help you reduce what you owe or get money back
1. Earned Income Tax Credit
Commonly referred to as the EITC, the Earned Income Tax Credit is intended as “a tax credit to help you keep more of what you earned,” according to the IRS. (Technically, that’s what all tax credits do.) To qualify for this, you must fall into a low- to moderate-earnings range and make income from employment, self-employment or another source.
The credit amount depends on your income and the number of children you have, if any. But it can go as high as $7,430.
As is often the case, there are rules involved that force many tax filers to make choices. You can claim a dependent for EITC purposes, and not claim them as an exemption if they qualify for the EITC. The dependent doesn’t necessarily have to be under 19: A full-time student under 24 also qualifies, as does a disabled dependent.
The EITC falls into the “refundable” category, so that in some cases tax filers will receive money from the government if the credit exceeds their tax bill. Unfortunately, government studies suggest that some 20% of households that are eligible for the EITC fail to claim it and miss out on that money.
For the 2023 tax year, the income limit to qualify for the EITC filing as a single or widowed head of household with no qualifying children is $17,640. But the limit with even just one qualifying child jumps to $46,560; with three children, it’s $56,838. Married filing jointly limits income to $24,210 with no children. That increases to $53,120 with one child, and to $63,398 with three children.
By law, the IRS cannot make a tax refund with an EITC component before March.
2. Saver’s Credit
The Saver’s Credit benefits those with low-to-moderate incomes, to give them an incentive to save toward retirement. It includes plans such as a traditional IRA or Roth IRA, SIMPLE IRA, SARSEP, 401(k), 403(b), 501(c)(18) or the governmental 457(b).
Calculated on the first $2,000 socked away ($4,000 for married couples), the maximum credit for the 2023 tax year is $1,000 for an individual and $2,000 for married couples filing jointly. However, the payout is often much less, reduced according to other deductions and credits taken.
The often-overlooked Saver’s Credit is an additional benefit to contributions to an employer-sponsored savings plan, coming on top of the reduced income from the tax deduction, which could make you qualify for the EITC (see above).
Don’t forget that many work-sponsored retirement plans offer matches on contributions, which means even more money for participants.
3. American Opportunity Tax Credit
The American Opportunity Tax Credit can be claimed for the first four years of postsecondary education. The student must be attending at least half time and pursuing a degree.
Unlike other education tax credits, expenses for course-related books and supplies that aren’t paid to the school itself are eligible. It’s worth up to $2,500 of the cost of tuition, fees and course materials, and 40% of what remains after your tax liability is reduced to zero is refundable.
A refundable credit can reduce your total tax owed to a negative number, meaning Uncle Sam pays you instead of the other way around. This means you could get a refund of up to $1,000 even if you owe no taxes.
4. Lifetime Learning Credit
The Lifetime Learning Credit (LLC) helps cover qualified tuition and related expenses for students pursuing undergraduate, graduate and professional degree courses. This includes courses intended to acquire or improve job skills, such as a teaching certificate.
In contrast to the AOTC, the Lifetime Learning Credit doesn’t require students to be pursuing a degree, can be claimed if attending only part time, and is not limited to the four years of undergraduate education. It’s worth up to $2,000 every tax year, but it’s nonrefundable. With a nonrefundable credit, you can only reduce your tax burden to zero, instead of getting money back through a refundable credit.
5. The Child Tax Credit
This longstanding tax credit reduces federal income taxes per child. It doesn’t matter if the child was born in late December. The Child Tax Credit will reduce your tax bill dollar-for-dollar.
The 2017 tax reform bill raised the credit amount from $1,000 to $2,000 per eligible child. The refundable portion may be $1,600. Legislation currently before Congress could expand the child tax credit for 2023 in favor of low-income families, raising the maximum credit amount for couples earning at least $2,500 and a maximum of $15,000 to $3,525. The legislation would raise the refundable amount to $1,800 for 2023.
The income threshold for receiving the full child tax credit is $400,000 for married filing jointly and $200,000 for all other filers. Beyond those amounts, the credit is reduced by $50 for every $1,000 of extra income.
6. Credit for Child and Dependent Care
The Credit for Child and Dependent Care is for people who, in order to work or look for work, need to pay for services for either their children, a spouse or a dependent of any age who is physically or mentally unable to care for themselves. The credit for up to 35% of expenses is capped at $3,000 for a single dependent and $6,000 for two or more.
7. Premium Tax Credit
The Premium Tax Credit, a fully refundable tax credit, helps citizens who are covered by a healthcare exchange through the Health Insurance Marketplace. The intent here is to ensure that the monthly premiums are more affordable for middle- and low-income Americans. It’s available only to those who do not have access to employer-sponsored programs or government programs like Medicaid and Medicare.
The tax reform bill did not affect this credit directly, but it did remove the requirement to have health insurance—the individual mandate—from 2019 on.
8. Adoption Credit
The Adoption Credit helps families offset the high cost of adopting a child. Qualified expenses include court/attorney fees, traveling expenses—such as meals and lodging while away from home—and any other associated costs of adoption. It applies to all forms of adoption except for that on the part of a step-parent.
For the 2023 tax year, the credit will be worth up to $15,950. If you adopt a special-needs child, you can claim the full credit amount even if your actual adoption costs are less. It is, however, nonrefundable, meaning the amount is limited to your actual tax liability, although it can be carried forward for five years.
NOTE: Information in this article is accurate as of February 29, 2024.
