Tax Credits for IRS Tax Returns
Save Money
And Reduce
Taxes
This page focuses on federal tax credits, but many states offer tax credits and deductions as well. A tax credit reduces your actual taxes; it decreases your payments or increases your tax refund. In comparison, tax deductions reduce your taxable income. IRS and state credits help you keep bigger slices of an apple; the more credits you claim, the more of your hard-earned money you get to keep by reducing your taxes owed or increasing your refund.
Key points:
How Do Tax Credits Work?
The best way to save money on taxes is to reduce your tax liability by claiming tax credits and deductions. Credits are payments towards the taxes you owe and, in some cases, can generate a tax refund if your tax liability is reduced to zero. There are two types of tax credits: refundable and nonrefundable - learn what the difference is.
What do tax credits do for you?
For a breakdown of tax credits, see more details below. Did you know that eFile.com automatically checks for tax credits as you enter information? Start free and see how simple filing your taxes online can be.
Are Tax Credits Different than Tax Deductions?
Above-the-line tax deductions reduce your taxable income. As a result, on your tax return Form 1040, you will have your adjusted gross income or AGI which includes these deductions or adjustments.
There are also standardized or itemized deductions. A standard deduction is an amount you are entitled to deduct from your taxable income based on your filing status. With an itemized deduction, you list each item you qualify for as a deduction. You can only claim a standardized or itemized deduction on your tax return.
Which deduction is best for you? The eFile Tax App will calculate this for you and apply the deduction method that is more advantageous for you in addition to calculating and applying all your tax credits.
Tax deductions are not direct payments to you as tax credits are. For example, if your total annual income was $50,000 and you qualify for $15,000 in tax deductions, your taxable income would be reduced to $35,000. By reducing your taxable income, you would be taxed based on your filing status and personal tax bracket. In order to claim or qualify for most tax credits (except some retirement contributions) for the 2023 tax year, the payments or expenses have to occur during the tax year or no later than December 31.
Attention: review extended or expired tax breaks, tax credits, and tax deductions.
On the other hand, tax credits are direct payments towards your taxes owed; these credits can reduce your taxes owed to $0 or even be paid directly to you via direct deposit.
Tax Tip: When you prepare your tax return on eFile.com, the tax app will automatically generate the correct form(s) for you to report your tax credits and deductions based on the information you provide. The software will suggest if you should itemize deductions or use the standardized deduction method on your tax return. We want you to keep more of your hard-earned money!
Read on for details on popular tax credits; see more details on which tax credits are refundable or nonrefundable.
What Credits Are Available for Families?
Having a family and claiming dependents can save you lots of money on your taxes each year. See a detailed overview of all child-related tax credits with links to tax calculators and tools.
Child Tax Credit
The Child Tax Credit (CTC) may be worth up to $2,000 for each qualifying child which can be claimed per qualifying dependent as long as you had earned income of at least $2,500. Up to $1,600 of the credit may be refundable for each qualifying child as the Additional Child Tax Credit for the 2023 tax year. This tax credit is meant to provide help to parents with qualifying children. The Child Tax Credit is different from the Child and Dependent Care Credit.
Use our free "CHILDucator" Child Tax Credit tool to learn whether or not you qualify for the Child Tax Credit. If your dependent does not qualify for the CTC, you may still be able to claim the Credit for Other Dependents.
Child and Dependent Care Tax Credit
There are certain cases where you may claim a credit on family-related expenses if you are working, in school, or are in the process of looking for a job. Depending on the particulars of the situation, you may reduce your tax by claiming the Child and Dependent Care Tax Credit on your federal income tax return for any expenses related to payments made to someone to care for a child under age 13, a qualifying spouse, or a dependent. This is generally applied towards daycare or babysitting payments you make to a company or individual for their services.
Adoption Tax Credit
The Adoption Tax Credit is designed to help parents with the expenses involved in adopting a qualifying child. An eligible child is any child under 18 or a child with special needs that lacks the ability to care for him or herself. The maximum available Adoption Tax Credit amount could be up to $16,000.
See more information on children tax savings and tax credits for parents with dependents and children.
Credit for the Elderly and Disabled
You may be able to claim the Credit for the Elderly or the Disabled if you are 65 years of age or older or if you retired on total and permanent disability and have taxable income. To take the credit, your income must not exceed certain limits described on the linked page.
Are There Tax Credits for the Working Class?
Earned Income Tax Credit
The Earned Income Tax Credit (EITC) is a credit for taxpayers who earn low to moderate incomes. The EITC can reduce your taxes and may result in a tax refund which helps more working families and individuals keep more of the money they earned.
The EITC may be worth $7,000 - to qualify, you must work and earn under a certain amount, have minimal investment income, have at least three dependents, not be claiming the Foreign Earned Income Exclusion, have a valid Social Security Number, and be a U.S. citizen for the whole year.
Use our free "EICucator" Earned Income Tax Credit tool to find out whether or not you qualify to claim the credit on your tax return.
Foreign Tax Credit
The Foreign Tax Credit was implemented to reduce a double tax burden for citizens earning income outside of the United States - once by the United States and again by the foreign country where the income is derived. See more information on foreign earned income and taxes.
U.S. citizens and resident aliens from the United States working or living in a foreign country during the year are allowed the same tax credits as U.S. citizens and residents from the U.S. living in the United States. Check out our detailed summary on tax credits for Americans living or working abroad.
What Medical Credits Can Be Claimed?
Premium Tax Credit
Individual taxpayers and families may be able to claim the refundable Premium Tax Credit (PTC) if they have low to moderate incomes and purchased health insurance through the Health Insurance Marketplace at HealthCare.gov. They can have the credit paid in advance to their insurance company in order to decrease their monthly premium payments or claim all of the credit on their tax return.
You can also deduct medical expenses if you itemize your deductions - these are separate from the PTC.
Are there Tax Credits for Students?
There are two major education tax credits available for both new and continuing students: the American Opportunity Credit and the Lifetime Learning Credit. Each credit offers special advantages to students, but both credits may not be claimed by or for the same student in the same year.
The American Opportunity tax credit is a partially refundable tax credit. This tax credit allows for up to 40 percent of the credit as a tax payment if you qualify to claim this credit for education expenses. When you use eFile.com, the tax app will separately calculate the refundable and nonrefundable portion on Form 8863 and eFileIT.
See our complete list of many student tax related topics.
Can You Get a Credit for Retirement Contributions?
Saver's Credit (Retirement Savings Contribution Credit)
The Saver's Credit, formerly known as the Retirement Savings Contributions Credit, helps middle-income families and individuals save for retirement if they contribute to a retirement plan.
The Saver's Credit allows taxpayers to reduce their income tax dollar-for-dollar by up to $1,000 ($2,000 for married filing jointly). The exact amount of the credit depends on their income, filing status, and the total amount of their qualified contributions.
You can also deduct retirement contributions regardless of if you itemize your deductions and save even more money.
Are There Credits for Green and Electric Energy?
The IRS offers substantial tax credits for those who try to invest in clean energy assets or properties, such as home improvements and electric vehicles.
The Energy Efficient Home Improvement Credit and the Residential Clean Energy Credit
These home improvement tax credits can save you money on taxes. The first is geared towards investments which make your home run more efficiently such as installing new doors or insulation while the latter is for green or clean energy investments like solar panels. Use eFile.com to help you claim these.
In addition, you can deduct mortgage insurance payments if you itemize your deductions. See more details on tax savings for homeowners.
Clean Vehicle Credit
If you are considering purchasing an electric vehicle or hybrid, see if your vehicle qualifies for the new Clean Vehicle Tax Credit. You could get up to $7,500 towards your purchase of a new plug-in EV or hybrid (PHEV) or up to $2,500 towards a used one.
How to Explain What a Tax Credit Is?
A "tax credit" refers to a payment towards your taxes; claiming these credits is the best idea to pay less taxes. Use tax software to claim tax credits for you and see your taxes owed reduce dollar-for-dollar based on your credits. In some cases, tax credits are money you get back when they are refundable. Credits are generally considered better than tax deductions because of this, but both serve to help you pay less taxes.
You may be able to get $10,000 in tax credits or a tax refund if you at least 18, not a dependent, earn low-to-moderate income, claim multiple dependents, and are a U.S. citizen. eFile helps you claim these at an affordable price for those just trying to get their taxes done.
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