How tax credits work, and why they’re one of the best ways to lower your tax bill

Tax credits are a simple way to pay less tax. They take money directly off your tax bill. Every $1 of tax credit lowers your tax by $1. This makes tax credits stronger than most other tax benefits. Some tax credits are refundable. This means you can get money back even if you do not owe any tax.

Many tax credits depend on how much money you earn. If you earn too much, the credit gets smaller or may stop completely. Tax credits are not the same as tax deductions. Deductions only lower your income that is taxed, but credits lower your tax directly. For example, if someone earns $50,000 and owes $6,000 in tax, a $1,000 tax credit lowers the tax to $5,000, as per the report by Bankrate.

Types of tax credits

In the same situation, a $1,000 tax deduction only slightly reduces the tax bill because it lowers income, not the final tax amount. There are three main kinds of tax credits used in the U.S. tax system. Nonrefundable tax credits can reduce your tax bill only until it reaches zero, and any extra credit amount is lost. Refundable tax credits allow you to receive the extra amount as cash if the credit is bigger than your tax bill. Partially refundable tax credits refund only a fixed part of the credit, while the rest only reduces tax.


One major group of tax credits is meant for families with children and dependents. The Child Tax Credit is available to parents with children under 17 if their income is below set limits. For the 2025 tax year, the Child Tax Credit can be worth up to $2,200 per child, as per the report by Bankrate. If a parent’s income is too high, the Child Tax Credit is reduced by $50 for every extra $1,000 earned above the limit. Part of the Child Tax Credit is refundable, and families can receive up to $1,700 as a tax refund.

Adoption and care credits

Parents who adopt a child may qualify for an adoption tax credit to help cover adoption expenses. The adoption tax credit can be worth up to $17,280 for the 2025 tax year. This adoption credit is partially refundable, with up to $5,000 paid back as cash. Any unused adoption credit can be carried forward and used to reduce taxes for up to five future years. Income limits apply to the adoption credit, and people earning above the top limit cannot claim it.

People who pay for child care or dependent care so they can work may qualify for another tax credit. This credit can be worth up to $1,050 for one dependent and up to $2,100 for two or more dependents. Only care expenses related to working count for this credit, not care paid for holidays or personal trips.

Earned income tax credit

The Earned Income Tax Credit is designed to help low- and moderate-income workers and families. For the 2025 tax year, the Earned Income Tax Credit can range from $649 to $8,046 depending on income and number of children, based on IRS data, as per the report by Bankrate. Workers without children can also claim the Earned Income Tax Credit if they meet age and income rules. The Earned Income Tax Credit is fully refundable, meaning eligible people receive the full amount as cash even if they owe no tax.

Education-related tax credits help students and families reduce the cost of learning. A person cannot claim two education tax credits for the same student in one year. The Lifetime Learning Credit covers many types of education, including job-skill courses. This credit can reduce taxes by up to $2,000 but does not provide a cash refund, as defined by the IRS. Income limits apply to the Lifetime Learning Credit, and higher earners do not qualify.

The American Opportunity Tax Credit supports students in their first four years of college. This credit can be worth up to $2,500 per student for tuition, books, and supplies. Part of the American Opportunity Tax Credit is refundable, and up to $1,000 can be paid out as cash, as noted by Bankrate.

Energy and savings credits

Tax credits for electric vehicles were ended by a major tax law in 2025. Electric vehicles bought before Sept. 30, 2025 may still qualify for the credit on 2025 tax returns. Some buyers already received the electric vehicle credit at the time of purchase through their dealer. There were also tax credits for clean energy home upgrades like solar panels. These clean energy credits ended in 2025, but upgrades completed by Dec. 31, 2025 can still be claimed. Qualified clean energy expenses include solar panels, wind turbines, and battery storage bought new. Labor costs for installing clean energy equipment can also count for the credit.

People with lower or moderate income may qualify for a saver’s credit when they invest in retirement accounts. The saver’s credit rewards contributions to retirement plans like 401(k)s and IRAs. The credit amount ranges from 10% to 50% of the contribution, depending on income, as per the report by Bankrate. The maximum saver’s credit is $1,000 for single filers and $2,000 for married couples filing jointly. Overall, tax credits are one of the best tools to lower a tax bill because they reduce taxes directly and sometimes even pay cash back.

FAQs

Q1. What is a tax credit and how does it reduce tax?

A tax credit cuts your tax bill directly and can sometimes give you cash back as a refund.

Q2. Who can claim popular tax credits in the US?

People with children, students, low-income workers, and savers may qualify if their income is within limits.