The biggest tax credits you can take advantage of

By Jessica Dosseh

A tax credit is a dollar-for-dollar reduction of the income tax you owe. There are three basic types of tax credits to take note of – refundable, nonrefundable, and partially refundable tax credits. Refundable tax credits can be some of the most beneficial due to the fact that they are paid out in full, whereas nonrefundable tax credits simply reduce the tax you owe to zero.

The biggest tax credits you can take advantage of.

What is a tax credit?

Tax credit refers to an amount of money that taxpayers can subtract from the annual taxes owed to the federal and state government dollar for dollar. Tax credits are designed to encourage and reward different types of behavior that are considered beneficial to society, the economy, and other sectors that the government deems valuable.

Tax credits have specific qualifications a taxpayer must meet to be eligible such as earned income, income level, family size, occupation, investment or savings, and other specific qualifications.

Once you are qualified, how does it work? If you owe $1,500 in federal taxes but are eligible for a $1.500 tax credit, your net liability drops to zero. In some other cases, you may qualify for a refund or partial refund. There are three primary tax credits to note: refundable, nonrefundable, and partially refundable tax credits.

What Is the Difference Between a Tax Credit and a Tax Deduction?

The major difference between deductions and credits is that tax deductions lower the amount of taxable income, and tax credits reduce the actual amount of tax owed. A tax credit can make a much more significant dent in your tax bill than a tax deduction.

Popular tax credits.

Refundable Tax Credits.

A refundable credit is a tax credit refunded to the taxpayer regardless of the taxpayer's liability amount. This allows taxpayers to receive a payment from the U.S. government through the Internal Revenue Service (IRS). Refundable credits can take the tax liability down below zero, and this amount is refunded in cash to the taxpayer.

Earned income tax credit

The earned income tax credit can get you between $560 and $6,935, depending on how many kids you have, your marital status, and how much you make. This credit is worth exploring if your adjusted gross income (AGI) is less than $59,000. (How it works.)

Child tax credit

The Child Tax Credit is a fully refundable tax credit for families with qualifying children. This credit can get you up to $3,600 per child. If you're eligible, you don't need income or a permanent address to claim this tax credit. (How it works.)

Partially Refundable Tax Credits.

American opportunity tax credit

You can get a maximum annual credit of $2,500 per eligible student, and 40% or $1,000 could be refunded if you owe no tax. This credit is subject to income limitations. The amount of the credit is based on qualified education expenses such as tuition, books, equipment, and school fees — but not living expenses or transportation. (How it works.)

Nonrefundable Tax Credits.

Most tax credits fall into the nonrefundable category. A nonrefundable tax credit means you get a refund only up to the amount you owe.

Saver's credit

Depending on your adjusted gross income reported on your Form 1040 series return, the amount of the credit is 50%, 20%, or 10% of up to $1,000 ($2,000 if filing jointly) in contributions to an IRA, 401(k), 403(b) or certain other retirement plans. The percentage depends on your filing status and income. The maximum income for the savers tax credit is $34,000 for single filers, $51,000 for heads of household, and $68,000 for those married and filing jointly. (How it works.)

Lifetime learning credit

You can claim 20% of the first $10,000 you paid toward tuition and fees for a maximum of $2,000. Like the American opportunity tax credit, the lifetime learning credit doesn't count living expenses or transportation as eligible expenses. You can claim books or supplies needed for coursework, and your modified adjusted gross income (AGI) must be no more than $80,000 for single filers or $160,000 for married couples filing jointly to claim the credit. (How it works.)

Child and dependent care tax credit

It covers a percentage of costs for a child under 13, a spouse or parent unable to care for themselves, or another dependent so you can work. Generally, it's up to 35% of $3,000 of expenses for one dependent or $6,000 for two or more dependents. (How it works.)

Adoption credit

The adoption credit covers up to $14,890 in adoption costs per child under 18. Your modified adjusted gross income must be $223,410 or less to qualify for the full credit. The credit begins to incrementally decrease at certain income levels and completely phases once you reach a modified adjusted gross income of $263,410 or more. (How it works.)

Residential energy credit

The residential energy credit provides tax credits based on a percentage of costs for energy-efficient home improvements. This credit can get you up to 30% of the installation cost of solar energy systems, solar water heaters, Energy-efficient heating and air conditioning systems, Insulation, and solar panels. (How it works.)

For a more information read the full list for a more comprehensive list of tax credits.