If you're preparing your tax filing, it's a great time to look for potential opportunities to lower your tax liability. One way is to take advantage of any tax credits available to you. If you're more familiar with tax deductions, you may wonder: What is a tax credit, exactly? Here's a closer look at what these credits are and how some of the more common federal tax credits work.
Tax credits vs. tax deductions
Tax credits shouldn't be confused with tax deductions. The difference between them is key: Tax deductions reduce the amount of taxable income you have—which can lower the amount of tax you owe in turn—while tax credits decrease your tax liability directly, dollar for dollar. The Internal Revenue Service may even refund some kinds of credits, as we'll see below.
Types of tax credits
Nonrefundable tax credits
A nonrefundable tax credit can reduce your total tax bill to zero, but not below that level. So, if there were a credit for $500, but you owed just $300 in taxes, you would be able a maximum credit of $300.
Nonrefundable tax credits are the most common credits in the federal tax code, and there are numerous credits available to filers. Here are some of the most common:
- Foreign tax credits: You may be able to claim foreign tax credits for taxes you paid on the amount of income earned from stocks, bonds, mutual funds, or income-producing investments in global markets.
- Child and dependent care credit: You may claim the child and dependent care tax credit for expenses you've paid for someone to look after your child or other qualifying person so you could work or look for work.
- Education tax credits: You can claim education credits if you, your dependent, or an eligible dependent party pays qualified education expenses for higher education.
- Retirement savings credit: You may be able to take this tax credit—commonly known as the Saver's Credit—for making eligible contributions to your IRA or employer-sponsored retirement plan. However, there are income limits. If you are eligible, the percentage you get depends on your adjusted gross income (AGI) and filing status, but you could potentially claim a credit of up to $1,000—or up to $2,000 if you file jointly with your spouse.
- Energy savings tax credit: You may claim these tax incentives if you've made energy-efficient home improvements or bought an electric vehicle.
Refundable tax credits
With a refundable tax credit, if the tax credit is greater than the amount of taxes you owe, the IRS could potentially send you the excess in the form of a refund. Refundable tax credits can be either fully or partially refundable, depending on the type of credit.
So, if there were a fully refundable $500 tax credit, but you owed just $300 in taxes, the credit would wipe out your entire tax liability—and the IRS would give you a $200 tax refund.
Here are some common refundable tax credits:
- Earned Income Tax Credit (EITC): Low-income taxpayers with qualifying children may be able to claim the Earned Income Tax Credit. The total tax credit is based on your taxable income and the number of children.
- Child Tax Credit: The Child Tax Credit helps families with qualifying children get a tax break. You may be able to claim the child tax credit even if you don't normally file a federal income tax return. For the 2025 tax year, the child tax credit is worth up to $2,000 per child under 17 years old. The refundable portion of credit, which is adjusted for inflation, is worth up to $1,700.
- American Opportunity Tax Credit: The American opportunity tax credit (AOTC) is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. You can get a maximum annual credit of $2,500 per eligible student. If the credit brings the amount of tax you owe to zero, the IRS could refund 40% of any remaining amount of the credit (up to $1,000) to you.
- Premium Tax Credit (PTC): This credit helps eligible individuals and families cover the premiums for health insurance purchased through the Health Insurance Marketplace. The credit is calculated based on individual income, tax brackets, and family size.
Talk with a tax professional about tax credits
If you're not sure which tax credits you may qualify for, you should consider working with a professional on your tax preparation. Also be aware that tax laws and eligibility rules are constantly changing, so even if you couldn't take advantage of any tax credits in the past, you may find you're eligible to do so now.
Qualifying for credits may not make preparing your taxes any more fun, but these tax benefits could help take some of the sting out your federal tax return. And maybe you could end up having the IRS pay you instead.
