Tax credits reduce the amount you owe in taxes, dollar for dollar. Learn more about common tax credits and how they can save you money.
Filing your taxes can be intimidating, but you might be able to lower your tax bill with tax credits. Tax credits are the golden ticket of the tax world since they reduce what you owe dollar for dollar and sometimes even lead to an unexpected refund.
If you qualify, you could keep more cash in your bank account and send less to Uncle Sam. Read on to learn how tax credits work and how you can use them to reduce your tax bill.
What are tax credits?
Tax credits reduce the amount of taxes you owe to your state or the federal government. They reduce your tax bill directly, dollar for dollar. If you owe $1,000 in taxes and qualify for a $600 tax credit, your final tax bill will only be $400.
Both the federal government and state governments offer tax credits for a variety of reasons, often to incentivize certain behaviors.
While the tax credit definition is simple, the eligibility requirements can be more complex. Tax credits are available for many reasons, including child care, child adoption, education, retirement savings, and mortgage interest.
The amount you qualify for can also vary depending on your income, filing status, and other factors. A tax advisor or tax preparation software can help you find tax credits that apply to your situation if you want to file your taxes online.
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Types of tax credits
Tax credits reduce the amount you owe in taxes. If you claim a credit when you file your taxes, you'll see your bill go down (or refund go up). If you claim a credit after filing, you may receive a refund if you've paid more taxes than you owe.
There are three main types of tax credits:
Refundable
These are the best types of tax credits because you'll receive the full amount even if your tax bill goes down to zero. Let's say you owe $400 in taxes and qualify for a $600 tax credit. Not only will your tax bill go down to nothing, but you'll also receive a refund of $200.
Nonrefundable
Nonrefundable tax credits can reduce your tax bill to zero. However, they won't generate a refund after your tax bill reaches $0. Using the above example, you'd see your $400 tax bill go down to zero, but you wouldn't get the $200 remainder with a nonrefundable tax credit.
Partially refundable
Some tax credits are a hybrid of refundable and nonrefundable, offering you a partial amount if the tax credit exceeds your tax bill. The American Opportunity Tax Credit for college students is one example. If your tax liability goes down to $0 after using the credit, you could receive a refundable credit of $1,000 or 40% of the remaining credit, whichever is less.
Common tax credits
While there are a variety of tax credits offered at the federal and state levels, here are some of the most common (and most significant) you might qualify for.
Child Tax Credit
The Child Tax Credit helps ease the costs of raising kids. For the 2025 tax year, the credit is worth up to $2,200 per qualifying child, and up to $1,700 of that is refundable through the Additional Child Tax Credit. The amount you can claim starts to phase out once your modified adjusted gross income exceeds $200,000 ($400,000 for married couples filing jointly), reduced by $50 for every $1,000 over the threshold. Our guide to the Child Tax Credit explains more.
Earned Income Tax Credit
The Earned Income Tax Credit is worth up to $8,046 for the 2025 tax year for taxpayers with three or more qualifying children (rising to $8,231 for 2026). It's available to people who are 19 or older (or students who are 24 or older) and aren't claimed as a dependent on anyone else's tax return.
You'll receive an amount based on income, household size, and other factors. For 2025, you can't qualify if you received more than $11,950 from investment income.
Generally, the Earned Income Tax Credit is worth investigating if your adjusted gross income is less than $61,555 as a single filer or less than $68,675 as a married couple with three or more qualifying children for 2025 (amounts and guidelines change every year). Many individual states also offer their own version of the Earned Income Tax Credit.
American Opportunity Tax Credit
The American Opportunity Tax Credit helps families who are paying for higher education. It offers up to $2,500 for qualifying higher education expenses, including tuition and course materials.
It covers all four years of college as long as the student is enrolled at least half-time. You could qualify for the full credit if your modified adjusted gross income is $80,000 or less as a single filer or $160,000 or less as a married couple filing jointly.
As mentioned, the American Opportunity Tax Credit may offer a partial refund if your tax bill goes down to $0 and you still qualify for an additional amount.
Tax credits in your state
Many states that collect income taxes offer tax credits to residents.
California, for example, offers a tax credit of $60 for individuals and $120 for married filers who paid rent in California for at least half the year and meet income and other guidelines. (see disclosure 3) Massachusetts offers a tax credit of $1,500 if you remove lead paint from your home. (see disclosure 4)
As mentioned, many states also provide qualifying taxpayers with an earned income tax credit. If you qualify for a state tax credit, it could reduce the amount of taxes you owe to your state.
Tax credits vs. deductions
Tax credits are not the same as tax deductions, though both can reduce your tax bill. Tax credits shave down your tax bill directly, whereas deductions reduce your taxable income.
Let's say, for example, your taxable income is $40,000. The tax bracket for single filers making $40,000 is 12%.
Find out what tax bracket you're in.
Without any tax credits or deductions, you'll owe $4,800 in taxes.
Now let's say you qualify for a $4,800 tax credit. You'll save $4,800 on your tax bill, meaning you won't owe anything.
But if you qualify for a $4,800 tax deduction, your savings will only be $576. The deduction will reduce your taxable income from $40,000 to $35,200, and you'll owe $4,224 in total.
Though both are beneficial, tax credits are more valuable than tax deductions.