Tax Credits
What are tax credits?
A tax credit is a dollar-for-dollar reduction of your tax liability. After you've calculated your federal taxable income and computed the tax on it, you can subtract any income tax credits that may apply to arrive at the amount of tax you must pay or the refund you'll receive.
What's the difference between a tax credit and a tax deduction?
A tax deduction reduces the income on which your taxes are calculated, and so only reduces your tax liability on a percentage basis (as determined by your marginal income tax rate). By contrast, a tax credit reduces your actual tax liability on a dollar-for-dollar basis.
For instance, if you're in the 24 percent marginal income tax bracket, a deduction of $100 will save you $24. But a tax credit of $100 will save you $100 regardless of your tax bracket.
What types of federal income tax credits are available?
The three main categories of tax credits are:
- The personal refundable and nonrefundable tax credits
- The business incentive tax credits
- The foreign tax credit
Personal refundable credits
If a personal refundable tax credit is greater than the amount of your tax liability, you can obtain an income tax refund. Examples of such refundable tax credits include:
- The refundable portion of the child tax credit ("additional child tax credit")
- The earned income credit
- Payments of estimated taxes
- Excess Social Security tax withheld
- Tax withheld from salaries and wages
Personal nonrefundable credits
Personal nonrefundable tax credits may reduce your tax liability, but not below zero.
There are several personal nonrefundable credits, including the following:
- The child and dependent care credit
- The tax credit for the elderly or the disabled
- The adoption tax credit
- The new clean vehicle tax credit*
- The previously-owned clean vehicles tax credit
- The energy efficient home improvement credit
- The residential clean energy property credit
- The American Opportunity (Hope) tax credit; a portion of the American Opportunity tax credit is refundable
- The Lifetime Learning credit
- The tax credit for IRAs and retirement plans
- The child tax credit (nonrefundable portion)
*Can also be a general business tax credit
Business incentive tax credits
The business incentive tax credits are designed to encourage certain economic activities, such as investment in disadvantaged communities. These business-related credits are combined into one "general business tax credit."
The foreign tax credit
Both business and individual taxpayers who qualify may take the foreign tax credit. Although this tax credit is nonrefundable, any foreign tax credit not used in the current tax year can be carried back for one year and carried forward for ten years.
Summary of the specific credits
Child tax credit
The child tax credit provides a tax credit of $2,200 per qualifying child. The credit is phased out for taxpayers with modified adjusted gross income (AGI) above certain levels. A portion of this credit may be refundable for certain taxpayers on IRS Form 8812, and special rules may apply for taxpayers with three or more qualifying children. A $500 nonrefundable credit is available for a qualifying dependent who is not a qualifying child.
Earned income credit
The earned income credit is available to certain low-income working taxpayers who have earned income and who receive no more than a specified amount of investment income during the year. Eligibility for this credit depends on several factors, including the number of qualified children you have (if any), your filing status, and the amount of your AGI.
Adoption tax credit
You may take a tax credit for your qualified expenses incurred in adopting an eligible child. In addition, you can exclude from your income certain adoption expenses paid or reimbursed by your employer under a qualified adoption assistance program.
The maximum credit and exclusion amount is $17,670 in 2026 ($17,280 in 2025) per child. For tax year 2026, the amount of credit that may be refundable is $5,120. Both the credit and the exclusion are partially phased out if your AGI exceeds $265,080 in 2026 ($259,190 in 2025), and completely eliminated when your AGI reaches $305,080 in 2026 ($299,190 in 2024).
You must file Form 8839 to claim the adoption credit.
Child and dependent care credit
You may be able to take this credit if, in order to work, you pay someone to care for your child who is under age 13, your qualified disabled dependent, or your disabled spouse. Several requirements and restrictions apply. You use Form 2441 to calculate the amount of this credit.
You generally can't claim this credit unless you report the correct name, address, and taxpayer identification number of the dependent care provider. The taxpayer identification number requirement is waived in the cases of certain tax-exempt providers.
Tax credit for the elderly or the disabled
To claim this credit, you or your spouse must be either of the following by the end of the year:
- Age 65 or older, or
- Under age 65, retired on permanent and total disability (a disability that is expected to last indefinitely, rendering the wage earner unable to work), and the recipient of taxable disability income during the year
In addition, your AGI as well as your total nontaxable Social Security and other nontaxable pension income must fall below certain limits.
New clean vehicle tax credit
Starting in 2023, a personal or a general business tax credit of up to $7,500 is available for the purchase of new clean vehicles meeting certain requirements (including electric, plug-in hybrid, and fuel cell vehicles). A credit of $3,750 is available if a critical minerals requirement is met, and a credit of $3,750 is available if a battery components requirement is met. Fuel cell vehicles that have final assembly within North America can qualify for the credit without regard to these two requirements. The credit is not available for vehicles with a manufacturer's suggested retail price exceeding certain limits or if the modified adjusted gross income of the purchaser exceeds certain limits. The credit is not available for vehicles purchased after September 30, 2025.
Previously-owned clean vehicles tax credit
Starting in 2023, a tax credit equal to the lesser of $4,000 or 30% of the sales price is available to individuals for the purchase of certain previously owned clean electric vehicles from a dealer. The credit is not available for vehicles with a sales price exceeding $25,000 or if the modified adjusted gross income of the purchaser exceeds certain limits. The credit is not available for vehicles purchased after September 30, 2025.
Qualified commercial clean vehicles tax credit
Starting in 2023, a general business tax credit of up to $7,500 ($40,000 if the vehicle weighs 14,000 or more pounds) is available for the purchase of qualified commercial clean vehicles meeting certain requirements. The credit is equal to the lesser of (a) 15% of the tax basis of the vehicle (30% if the vehicle is not powered by a gasoline or diesel internal combustion engine), or (b) the incremental cost of the vehicle. The incremental cost is the excess of the purchase price of the clean vehicle over the price of a comparable vehicle that is powered solely by a gasoline or diesel internal combustion engine. The credit is not available for vehicles purchased after September 30, 2025.
Energy efficient home improvement credit
The amount of the credit is equal to 30% of the sum of amounts paid by the taxpayer for certain qualified expenditures. There are limits on the allowable annual credit and on the amount of credit for certain types of qualified expenditures. The credit is available for building envelope components, certain energy property, and home energy audits. The maximum annual credit amount may be up to $3,200. The credit expires on December 31, 2025. The credit is not available for any property placed in service after December 31, 2025.
Residential clean energy property credit
There is a 30% credit for certain qualified expenditures made by a taxpayer for residential clean energy property. The credit is available for solar panels, solar water heaters, fuel cell property, wind turbines, geothermal heat pump property, and battery storage technology. The credit expires December 31, 2025.. The credit is not available for any property placed in service after December 31, 2025.
American Opportunity (Hope) credit
The American Opportunity (Hope) tax credit is for taxpayers who pay certain higher education costs. It's available for qualified higher education expenses that you (or your spouse or dependent) incur at an eligible educational institution. The maximum tax credit is generally $2,500 per student per year for qualified tuition and related expenses incurred during the first four years of post-secondary education. The amount of your credit (if any) depends on the level of your AGI. To qualify for this credit, you must meet several requirements. Up to 40 percent of the American Opportunity tax credit is refundable.
Lifetime Learning credit
The Lifetime Learning credit is generally worth up to $2,000 per year for qualified tuition and related expenses incurred for course work at eligible educational institutions. The credit is not limited to the first four years of post-secondary education (the credit is also available for graduate and professional-level courses), and you may enroll as less than a half-time student and still qualify.
Tax credit for IRAs and retirement plans
The tax credit for IRAs and retirement plans was designed to encourage certain low- and middle-income taxpayers to save for retirement. Qualifying taxpayers may claim a nonrefundable income tax credit for contributing to certain tax-deferred retirement savings vehicles, such as IRAs, 401(k) plans, and others. If you're eligible, the amount of your credit (if any) will depend on your AGI, your filing status, and the amount of your IRA and retirement plan contributions for the year.
General business tax credit
The general business tax credit is comprised of a series of credits that businesses can claim. These credits, listed on Form 3800, include the following:
- Disabled access credit
- Empowerment zone employment credit***
- New markets credit
- Work opportunity credit***
- Low-income housing credit
- Small employer pension plan startup credit
- Credit for employer-provided child care
- Investment tax credit
- Credit for employer-paid FICA tax on employee tips
- Research expense credit
- Renewable electricity production credit
- Alcohol fuels credit
- Orphan drug credit
- New clean vehicle tax credit*
- Qualified commercial clean vehicles tax credit
- Alternative fuel vehicle refueling property credit*****
- Energy-efficient new home construction credit*****
- Small agri-biodiesel fuel producer credit
- Fuel cell and micro-turbine power plant credit
- Differential wage payment credit
- Small business health-care credit
*Can also be a personal tax credit
**This credit is extended through 2024
***This credit is extended through 2025.
****This credit expires December 31, 2025.
*****This credit expires after June 30, 2026.
The amount of the general business credit generally cannot exceed your net income tax reduced by the greater of:
- The tentative minimum tax, or
- Twenty-five percent of the excess of your net income tax over $25,000
If this limitation prevents you from claiming your full general business credit, you can carry back and then carry forward unused credits.
Special limitation rules apply to several of the individual credits listed above.
Foreign tax credit
If you pay income taxes to both the United States and a foreign government on the same income, you may choose on your U.S. federal income tax return between claiming a deduction or a tax credit for the foreign income taxes you paid. In most cases, it is more advantageous to take the credit. The credit applies to income taxes you pay to a U.S. possession, a foreign country, or to any province, state, city, or other subunit of a foreign country.
Health-care reform
Health-care reform legislation passed in 2010 requires most Americans to have qualifying health insurance. As part of this change, the legislation creates a refundable premium assistance credit beginning in 2014 to help lower-income individuals purchase coverage. To be eligible, a person's household income must meet certain limits. The credit is calculated on a sliding scale, based on income.
