Tax Credits Worth Claiming

A tax credit is the most valuable line on a return, and the easiest to miss. A deduction lowers the income your tax is figured on; a credit lowers the tax itself, dollar for dollar, and some credits are paid to you even when you owe nothing. Many credits phase out with income or require a form most people never open, so eligible households regularly leave them unclaimed. This chapter explains how credits differ from deductions, then walks through the credits for children and dependents, education, retirement saving and low to moderate earnings, and what happened to the energy and electric vehicle credits in 2025.

Why a credit beats a deduction of the same size

A deduction saves your marginal rate on each dollar, as chapter 1 showed. A credit saves the whole dollar.

A married couple with $100,000 of income owes $7,640 before credits. A child tax credit of $2,200 takes that same amount straight off the bill. A deduction of the same size would only lower their income to $97,800 and their tax to $7,376, saving 12.0% of it. The credit is worth roughly eight times as much here.

Refundable or not. A nonrefundable credit can reduce your tax to zero but no further; any unused part is usually lost, although a few credits let you carry it to a later year. A refundable credit is paid to you even if it exceeds your tax. Some are partly refundable. This distinction decides how much a credit is worth to a household with little income tax.

Credits for children and other dependents

Child tax credit. For 2026 it is $2,200 for each qualifying child under 17 at the end of the year. Up to $1,700 per child is refundable as the additional child tax credit, for families with earned income above a small threshold. The credit shrinks by 5% of modified adjusted gross income above $200,000, or $400,000 on a joint return; those thresholds are not indexed for inflation. The child must have a Social Security number valid for work, and under the 2025 law at least one parent claiming the credit must have one too.

Credit for other dependents. A dependent who does not qualify for the child tax credit, such as a 17-year-old, a college student or a parent you support, may qualify for a $500 nonrefundable credit, with the same income phase-out.

Child and dependent care credit. If you pay for care of a child under 13 or a disabled dependent so that you (and your spouse) can work or look for work, a percentage of up to $3,000 of costs for one person, or $6,000 for two or more, comes back as a nonrefundable credit. Daycare, before- and after-school programs and day camps qualify; overnight camp and school tuition from kindergarten up do not. The percentage depends on income, and the 2025 law raised it for many families starting in 2026, so read the current Form 2441 instructions rather than an older article. If your employer offers a dependent care flexible spending account, money run through it reduces the expenses that count for the credit; compare the two before enrollment, because the account is often worth more for higher earners.

Education credits

Two credits cover tuition and required fees. You can claim only one per student per year.

American opportunity tax credit. Up to $2,500 per eligible student for each of the first four years of higher education: 100% of the first part of qualified costs and 25% of the next part. 40% of it is refundable. The student must be enrolled at least half time in a degree or credential program and have no felony drug conviction.

Lifetime learning credit. Up to $2,000 per return, 20% of qualified costs, for any year of higher education and for courses to gain or improve job skills. It is nonrefundable and has no limit on the number of years.

Both phase out between modified adjusted gross income of $80,000 and $90,000 for a single filer, and between $160,000 and $180,000 on a joint return. Married people filing separately cannot claim either.

Two details trip people up. Expenses paid with tax-free scholarships or a 529 plan withdrawal cannot also count toward a credit, so it often pays to leave enough tuition paid from other money to claim the full American opportunity credit. And parents with income above the phase-out sometimes get more by not claiming the student as a dependent, so the student can claim the credit; the rules here are specific, so read IRS Publication 970 first.

The saver's credit

Lower- and moderate-income workers who put money into a 401(k), 403(b), IRA or ABLE account can get a credit of 50%, 20% or 10% of up to $2,000 of contributions per person, depending on income. It is nonrefundable, and full-time students and people claimed as someone else's dependent cannot take it. The income limits are adjusted each year; check the IRS saver's credit page for 2026. Starting with 2027, the credit is scheduled to become the saver's match, deposited into the worker's retirement account instead of reducing tax.

The earned income tax credit

The earned income tax credit is a refundable credit for working people with low to moderate income, larger for families with children. It rises with earnings up to a point, stays level, then phases out. Investment income above a yearly limit disqualifies you, and the amounts and income limits change each year, so use the IRS EITC Assistant rather than a figure from a past year. The IRS estimates that a meaningful share of eligible workers do not claim it, often because they earn too little to be required to file. If your income was low, filing to claim the credit can be worth more than any deduction in this book.

Energy and vehicle credits: mostly ended in 2025

The 2025 law ended several credits that older guides still describe:

• The clean vehicle credit for new and used electric vehicles ended for vehicles acquired after September 30, 2025.
• The energy efficient home improvement credit (insulation, windows, heat pumps) ended for property placed in service after December 31, 2025.
• The residential clean energy credit (solar panels, battery storage, geothermal) ended for expenditures made after December 31, 2025.

If you installed or bought something before those dates, the credit may still be claimed on that year's return or carried forward where the rules allowed. For 2026 purchases, plan without them unless Congress changes the law again.