What Is an IRS Tax Credit and How Do You Claim One?

An IRS tax credit is a tool that directly reduces a taxpayer’s income tax liability, providing a dollar-for-dollar reduction of the taxes you owe. For instance, if you owe $2,000 in taxes and qualify for a $1,000 tax credit, your tax bill is lowered to $1,000. This is different from a tax deduction, which only lowers your taxable income. A $1,000 deduction for someone in the 22% tax bracket saves $220, whereas a $1,000 credit saves the full $1,000.

Refundable vs Nonrefundable Credits

Tax credits are categorized as either nonrefundable or refundable. A nonrefundable credit can reduce a taxpayer’s liability to zero, but no portion of the credit is paid out if it exceeds the tax owed. Any excess amount is not received as a refund.

For example, if a taxpayer owes $800 in income tax and qualifies for a $1,000 nonrefundable credit, the credit will eliminate the $800 tax liability. The remaining $200 of the credit provides no further benefit and is not paid to the taxpayer.

A refundable credit is paid out as a refund even if the taxpayer owes no tax or if the credit amount exceeds the tax liability. They are treated as tax payments you have made during the year. If the credit is larger than the tax you owe, the IRS will send you the difference.

Using a parallel example, if a taxpayer owes $800 in tax and qualifies for a $1,000 refundable credit, the credit first covers the $800 tax bill. The remaining $200 is then issued to the taxpayer as a direct refund.

Common Tax Credits for Families and Education

The Earned Income Tax Credit (EITC) is a refundable credit for low-to-moderate-income working individuals and families. Eligibility depends on rules regarding investment income, earned income, and adjusted gross income (AGI). Taxpayers with qualifying children receive a larger credit, but smaller credit amounts are available for workers without a qualifying child, who must meet age, relationship, residency, and joint return tests.

The Child Tax Credit (CTC) helps families with the costs of raising children. To claim the credit, the child must be under 17 at the end of the tax year, be a U.S. citizen, and be claimed as a dependent. The CTC is partially refundable through the Additional Child Tax Credit (ACTC), allowing for a refund of up to $1,700 per child if the credit exceeds the tax owed.

Taxpayers may claim the Credit for Other Dependents (ODC) for dependents who do not meet the criteria for the CTC, such as a child who is 17 or older or a qualifying relative. This is a nonrefundable credit that provides tax relief for those supporting individuals who don’t fit the definition of a qualifying child for the CTC.

The Child and Dependent Care Credit is a nonrefundable credit for taxpayers who pay for care for a qualifying individual to be able to work or look for work. A qualifying individual is a dependent child under 13 or a spouse or other dependent incapable of self-care who lived with the taxpayer for more than half the year. The credit is a percentage of care expenses, with the percentage decreasing as income rises.

The American Opportunity Tax Credit (AOTC) is for eligible students in their first four years of postsecondary education pursuing a degree. The student must be enrolled at least half-time for one academic period during the tax year. The AOTC is partially refundable, with 40% of the credit (up to $1,000) available as a refund even if no tax is owed.

The Lifetime Learning Credit (LLC) is a nonrefundable credit for tuition and fees for courses taken to acquire job skills. Unlike the AOTC, there is no limit on the number of years the LLC can be claimed, and the student does not need to be pursuing a degree.

Common Tax Credits for Homeowners and Savers

The IRS offers credits for purchasing certain environmentally friendly vehicles. The New Clean Vehicle Credit is a nonrefundable credit for buying a qualifying new electric or fuel cell vehicle. The Used Clean Vehicle Credit is a nonrefundable credit for a qualified used clean vehicle. Both credits have eligibility rules based on the taxpayer’s modified adjusted gross income (MAGI), the vehicle’s price, and other requirements.

Homeowners can benefit from the Residential Clean Energy Credit, a nonrefundable credit for the cost of new, qualified clean energy property for a residence. Eligible expenses include installing solar panels, solar water heaters, wind turbines, and geothermal heat pumps. The credit is a percentage of the total cost of these systems without an annual or lifetime dollar limit.

The Energy Efficient Home Improvement Credit is a nonrefundable credit that helps offset the cost of specific upgrades, such as new exterior doors, windows, and insulation. The credit also covers home energy audits and has annual limits on the total amount that can be claimed, with specific caps for different improvements.

The Retirement Savings Contributions Credit, or Saver’s Credit, is a nonrefundable credit for low- and moderate-income taxpayers who save for retirement. It is available for contributions to an IRA or an employer-sponsored plan like a 401(k). The credit amount is a percentage of the first $2,000 contributed ($4,000 if married filing jointly), with the percentage based on AGI and filing status.

Required Information and Documentation for Claiming Credits

Claiming a tax credit requires specific documentation to prove eligibility, and the IRS requires taxpayers to maintain records for each credit. A valid Social Security Number (SSN) is needed for the taxpayer, spouse, and any dependents for most family-related credits like the EITC and CTC.

For income-based credits, Form W-2 is needed to show annual wages. To claim education credits like the AOTC or LLC, you need Form 1098-T from the educational institution. For the Child and Dependent Care Credit, you need records of payments and the care provider’s name, address, and Taxpayer Identification Number (TIN).

For homeowner credits for clean vehicles or energy improvements, you must keep purchase agreements, receipts, and manufacturer certifications. This information is used to complete specific IRS forms to calculate the credit. For example, Schedule EIC is for the EITC, Form 8812 is for the Child Tax Credit, Form 8863 is for education credits, and Form 2441 is for child care expenses.

How to Claim Tax Credits on Your Return

After completing the specific forms for each credit, you transfer the final amounts to your main tax return. The credit amounts calculated on their specific forms are carried over to Schedule 3 (Form 1040), Additional Credits and Payments. The total from Schedule 3 is then entered on your main Form 1040, where the credits are applied against your total tax.

Finally, you submit the complete tax return. E-filing software handles these transfers automatically, and after submitting electronically, you will receive a confirmation that the IRS has accepted your return. If filing by mail, attach all required forms and schedules behind your Form 1040 and mail the package to the IRS.