What are tax credits?

Tax credits are one of the most powerful tools a taxpayer has at their disposal to reduce or eliminate their actual tax burden. Different from tax deductions, tax credits allow you to reduce the amount of taxes you have to pay on a dollar-for-dollar basis. For example, if you owe $5,000 in taxes, but you’re eligible and apply a $2,000 tax credit, you will only have to pay $3,000. By comparison, a tax deduction only reduces the amount of income on which you’ll have to pay taxes. So if you claim $75,000 of income for a year, and you apply a $2,000 tax deduction, you’ll still need to pay taxes on $73,000. You will still see a tax savings, but the amount you save will be dramatically less than with a tax credit.

Who qualifies for tax credits?

The good news is that there are a number of tax credits for both individuals and businesses. The federal government and state governments administer several tax credit programs for a variety of situations ranging from child and dependent care, to education expenses, energy efficiency and solar energy, and many more. In some instances, county and city governments may also offer localized tax credits for certain types of activities as well.

In general, tax credits are implemented to either assist individuals and families with activities that are beneficial to the economy and society (i.e. education and retirement savings tax credits), or to help reduce the burden of activities that are expensive and can take a big bite out of living expenses, (i.e. child and dependent care tax credits). Each federal and state tax credit has specific eligibility requirements and refund amounts. You will need to research those for which you qualify, or consult with a tax professional to ensure you get the maximum amount due to you.

What is the difference between a refundable and non-refundable tax credit?

Tax credits are either refundable or non-refundable. Understanding how each one works is important in knowing what your final tax burden may be. Refundable tax credits mean that you will receive the full amount of the tax credit, even if the tax credit exceeds the amount of taxes that you owe. For example, if you have taxes of $800 due, but you have a $2,000 refundable tax credit, you will get a tax refund of $1,200 coming back to you.

A non-refundable tax credit means that you will not receive a refund if the tax credit exceeds the amount of taxes you owe. The best you can hope to do is to zero out your tax liability. For example, if you have taxes of $800 due, but you have a $2,000 non-refundable tax credit, you will end up owing no taxes, but you will not get a $1,200 refund. Most federal tax credits are non-refundable. As of 2015, the American Opportunity tax credit for education expenses is partially refundable, up to 40 percent. This means if you have a $1,000 American Opportunity tax credit, you can claim $400 as a refundable tax credit, and $600 as a non-refundable tax credit.

Federal Tax Credits For Individuals

Family and Dependent Credits

Earned Income Tax Credit

The Earned Income Tax Credit (EITC) applies to low- and middle-income taxpayers and was established to offset the burden of paying Social Security taxes while also providing an incentive for people to work. You must file your taxes as an individual or married filing jointly, and all members of your family must have Social Security numbers. You must be between the ages of 25 and 65 to be eligible. The good news is that if you are self-employed, you can still be eligible for this tax credit because it is based solely on income. The IRS includes net earnings from self-employment, wages, salaries, tips, union strike benefits and long-term disability benefits in calculating this credit. However, certain types of income may disqualify you, including income from investments, child support, alimony, retirement income, and Social Security benefits. It’s important to monitor eligibility for this benefit every year, because your situation can change, or tax laws can change as well.

The tax credit can be considerable. In 2015, a family with three children earning less than $53,267 could receive the maximum credit of $6,242. One the low end, a person who earned $14,820 or less with no children would have received $503.Because it is fully refundable, the EITC is a federal tax credit that can have a significant impact on a family’s bottom line when all criteria are met.

Child Tax Credit

The Child Tax Credit is another tax credit that can have a big impact on family finances because individuals can get up to $1,000 for each child under 17 who meets all the Child Tax Credit qualifications. There are six criteria you must meet to qualify:

  • Age – a child must be under age 17 at the end of the tax year.
  • Relationship – the child must be a son, daughter, stepchild, foster child, adopted, sister, brother, stepbrother, stepsister or a descendent of any of these individuals, including grandchildren, nieces or nephews.
  • Support – the child must not have provided more than half of their own support.
  • Dependent – the child must be claimed as your dependent on your federal tax return.
  • Citizenship – the child must be a United States citizen, a U.S. national, or a U.S. resident alien.
  • Residence – the child must have lived with you for at least half of the year.

In addition, the Child Tax Credit is reduced if you go over certain adjusted gross income levels:

  • $55,000 for married couples filing separately
  • $75,000 for single, head of household
  • $110,000 for married couples filing jointly

Your tax credit is reduced by $50 for each $1,000 in income you claim over and above the various threshold limits. The biggest difference between the Child Tax Credit and the EITC is that it is non-refundable, meaning you can only claim the Child Tax Credit to the extent that it brings your tax liability down to zero.

Child and Dependent Care Credit

The Child and Dependent Care Credit helps offset the costs of care for individuals, allowing you to work or to look for work. The credit is up to $3,000 for a qualifying individual or $6,000 for two or more qualifying individuals. The actual amount of the credit you can claim can be up to 35% of your expenses, and will depend on your adjusted gross income. Qualifying individuals are defined as a dependent child under 13 years old or a spouse who is physically or mentally unable to care for themselves who lived with you for at least half of the year. You must identify all people who cared for your dependent, and they cannot be a spouse or the parent of a qualifying person, or one of your own children who is under 19 years old.

Adoption Tax Credit

The Adoption Tax Credit is for expenses you pay when you adopt a child. It applies to the foreign or domestic adoption of a child under 18 years old or a person who can’t physically or mentally take care of themselves. It is nonrefundable and the maximum amount is $13,400 per child. You can carry over the credit on your taxes for up to five years. In addition, the Adoption Tax Credit begins to be reduced if your adjusted gross annual income is more than $201,010 and it falls to zero when your income exceeds $241,010.

Credit for the Elderly or Disabled

To be qualified for a Credit for the Elderly or Disabled, you must be a U.S. citizen or resident alien and at least 65 years old in the year you are claiming the credit. You can also claim the credit if you are under 65 years old and on permanent and total disability, received taxable disability income for the year you are claiming and you have not reached mandatory retirement age. If you’re under 65, you must also have your physician certify that you were disabled on the date you retired. The tax credit ranges between $3,750 and $7,500, but you must meet certain income limits or non-taxable Social Security, pensions, annuities or disability income limits. 

Healthcare Credits

Premium Tax Credit (Affordable Care Act)

The Premium Tax Credit helps people with low to moderate incomes afford health insurance bought through a Health Insurance Marketplace. This tax credit is extremely helpful because it allows monthly advance payments to be made directly to health insurance providers. When you claim the tax credit and make advance payments, a formal final amount is reconciled on your taxes at the end of the year. To qualify, you must have a household income that is at least 100 percent but no more than 400 percent of the federal poverty line. In 2015, those income levels were as follows:


100% of FPL
400% of FPL
One person
$11,670
$46,680
Family of two
$15,730
$62,920
Family of four
$23,850
 $95,400

Health Coverage Tax Credit

The Health Coverage Tax Credit pays 72.5 percent of qualified health insurance premiums for eligible families. This credit will run through 2019. This credit does not cover Health Insurance Marketplace policies for 2016 and beyond. It also does not cover any amounts paid for by you or your spouse that have been paid for by your employer where the employer paid for at least 50 percent of the coverage. This tax credit is also helpful because it allows advance tax credit payments to be made directly to insurers.

Education Tax Credits

American Opportunity Tax Credit 

The American Opportunity Tax Credit applies to the first four years of college and allows a credit for tuition, enrollment fees and course materials. It allows a credit of up to $2,500 per student per year. Your modified gross adjustable income must be $90,000 or less for individuals or $180,000 or less for those filing jointly. Up to 40 percent of this tax credit may be refundable.

Lifetime Learning Credit

The Lifetime Learning Credit is a nonrefundable tax credit that allows payment for tuition and enrollment at eligible educational institutions. There is no limit to the number of years this credit can be claimed and it is worth up to $2,000 per year. It is calculated as 20 percent of the first $10,000 of qualified education expenses. Your modified adjusted gross income must be less than $65,000 if you are filing individually or $130,000 if you are married and filing jointly. You cannot claim this credit if you are claiming the American Opportunity Tax Credit.

Homeowners Credits

Mortgage Interest Tax Credit

You may be able to apply a nonrefundable tax credit to your federal income tax for mortgage interest expenses if you were issued a Mortgage Credit Certificate by a state or local government for low-income housing. If you sell your home after you have taken this credit, you may be required to repay all or part of the credit.

Residential Energy Efficient Property Tax Credit

You can earn a credit of 30 percent related to the costs of implementing qualified:

  • Solar electric systems
  • Solar water heaters
  • Fuel cell property
  • Small wind energy property
  • Geothermal heat pumps.

There is no dollar limit on this tax credit for most properties. If the credit is more than the tax you owe for the current year, you can carry the remaining credit forward to the following year’s return.

Low-Income Housing Tax Credit

Owners of low-income housing that meet certain criteria can take a tax credit over a 10-year period. Owners must not exceed maximum rent standards or they run the risk of having their credits recaptured and losing the opportunity to take future credits. States are responsible for monitoring ongoing quality controls and operations of properties to make sure they remain in compliance. 

Income and Savings Credits

Saver’s Tax Credit

The Saver’s Credit, also called the Retirement Savings Contributions Credit, encourages lower and moderate-wage workers to save for retirement. The amount of the credit is 10, 20 or 50 percent of retirement plan or IRA contributions up to $2,000 if filing individually or $4,000 if married, filing jointly, and the amount you are eligible for will depend on your adjusted gross income.  

Foreign Tax Credit

The Foreign Tax Credit gives taxpayers a break if they paid taxes in a foreign county or a U.S. possession and are subject to a tax on the same income in the United States. Individuals may be able to claim an itemized deduction instead.

Excess Social Security and RRTA Tax Withheld

This tax credit is for taxpayers who worked for multiple employers and had too much Social Security tax withheld from their pay. It is also for railroad employees who had excessive retirement taxes withheld. It is a refundable tax credit which means taxpayers will get money back even if they have no tax liability for the year this credit is claimed.

Credit for Tax on Undistributed Capital Gain

If an investment company, such as those who administer mutual funds, or a real estate investment trust (REIT) paid taxes on your behalf for a capital gain distribution, you can claim a refundable tax credit for Tax on Undistributed Capital Gain. The mutual fund or REIT will send an individual a Form 2439 showing their share of the undistributed capital gains and the amount of the tax that was paid.

Nonrefundable Credit for Prior Year Minimum Tax

Individuals and corporations that benefit from deductions and credits are subject to the Alternative Minimum Tax, which ensures they pay at least some taxes in a year. If you paid an AMT in previous years but are not liable for an AMT in the current tax year, you may be able to claim a Nonrefundable Credit for Prior Year Minimum Tax.

Credit to Holders of Tax Credit Bonds

Bond holders can elect to receive a tax credit instead of receiving some or all of the interest on a bond. This tax credit applies to various energy bonds, qualified school construction bonds, Build America Bonds or certain zone academy bonds. 

Electric Vehicle Credits

 To facilitate America’s conversion to clean energy vehicles, the federal government offers a series of nonrefundable electrical vehicle tax credits. Generally, the credits range from $1,000 to up to $7,500 depending on the program. Currently, four tax credits are offered:

  • Plug-in Electric Drive Motor Vehicle Credit
  • Plug-in Conversion Credit
  • Alternative Fuel Vehicle Refueling Property Credit
  • New Qualified Fuel Cell Motor Credit

Not all vehicles qualify, and any that do must have a gross vehicle weight of 14,000 pounds or less. 

To get the tax credit, individuals must be the original owners. In other words, you can’t claim the credit if you’re buying a used electrical vehicle. The same thing applies if you lease an electrical vehicle because the leasing company will have likely claimed the tax credit for themselves.

For more information on tax credits

A complete list of non-refundable tax credits can be found under the “Taxes and Credits” section of 1040 and 1040A forms. They are also listed under the “Payments, Credits and Tax” section on the 1040EZ form.

You can also find out more about federal tax credits by going to the Internal Revenue Service Credit and Deductions website.

Federal and state tax credits reduce the amount of income tax that a taxpayer owes on a dollar-for-dollar basis. For example, if you owe $5,000 in federal taxes and are eligible for a $5,000 federal tax credit, your tax liability is zero.

Individuals, as well as businesses, can get federal tax credits. States often offer tax credits as well.

Tax credits generally fall into one of two categories: refundable and nonrefundable.

If a credit is refundable, you’ll get a tax refund if the credit amount exceeds your tax bill. For instance, if you owe $800 in taxes and are entitled to a $1,000 (refundable) credit, you will get a $200 refund. If you’re already getting a tax refund, your refund will be increased by $1000 as the result of the credit.

Refundable federal tax credits include, for example, the following credits.

Other tax credits are nonrefundable, which means the credit reduces the amount you owe, but you won’t get a refund based on the credit. For example, if you qualify for a $450 tax credit and your tax liability is $300, you will only receive a $300 credit on your tax return, but no refund for the remaining $150 of the credit.

Most tax credits are nonrefundable. Nonrefundable federal tax credits include, for example, the following credits.

A tax credit can also be considered partially refundable. With this type of credit, a portion of the tax credit is refundable. One example of a partially refundable federal tax credit is the American Opportunity Tax Credit.

If you find a tax credit that you didn’t previously realize that you could claim when you filed your original return, you can file an amended return. To claim a refund, you must file no more than three years from the date you filed your original tax return or no more than two years from the date you paid the tax, if that date is later than three years.

Tax Credits vs. Tax Deductions

Both tax credits and tax deductions lower the amount of taxes you’ll have to pay, but in a different way.

Tax credits lower the amount of income tax that you must pay. Tax deductions, on the other hand, reduce the amount of your income that is subject to tax. (A deduction basically lowers your taxable income, which means that when you calculate your tax liability, you’ll do so against a lower amount.)

The bottom line is that you subtract tax credits from the amount of tax you owe whereas you subtract tax deductions from your income—before you figure out the amount of tax that you owe.

Available Federal Tax Credits for Individuals

The following federal tax credits are available for individuals:

  • Earned Income Tax Credit
  • Child and Dependent Care Credit
  • Adoption Credit
  • Child Tax Credit (and Additional Child Tax Credit)
  • Credit for the Elderly or Disabled
  • Premium Tax Credit
  • Health Coverage Tax Credit
  • Retirement Savings Contributions Credit (Saver's Credit)
  • Foreign Tax Credit
  • Excess Social Security and Railroad Retirement Tax Act (RRTA) Tax Withheld
  • Credit for Tax on Undistributed Capital Gain
  • Nonrefundable Credit for Prior Year Minimum Tax
  • Credit to Holders of Tax Credit Bonds
  • Lifetime Learning Credit
  • American Opportunity Tax Credit
  • Mortgage Interest Credit
  • Residential Energy Efficient Property Credit
  • Nonbusiness Energy Property Credit
  • Low-Income Housing Credit (for Owners of Low-Income Housing)
  • Plug-in Electric Drive Motor Vehicle Credit
  • Plug-in Conversion Credit
  • Alternative Fuel Vehicle Refueling Property Credit

Qualified Fuel Cell Motor Vehicle Credit (Alternative Motor Vehicle Credit)

Summary of Federal Tax Credits Available for Families and Dependents

Earned Income Tax Credit

The Earned Income Tax Credit (EITC) is a tax credit for low-income and middle-income taxpayers. Basically, it is for those who work, but do not earn a significant amount of money.

Workers with and without children may be eligible for this credit. The credit is smaller for those without children. To get the credit (even if you don’t owe taxes or aren’t required to file), you must file a tax return. The credit is set to expire at the end of 2017.

This tax credit is refundable.

The maximum amount of the credit for the tax year 2015 is:

  • $6,242 (three or more qualifying children)
  • $5,548 (two qualifying children)
  • $3,359 (one qualifying child), or
  • $503 (no qualifying children)

Basic Eligibility Requirements

You may qualify for the EITC if you have earned income from working (as an employee, or from running/owning a business or farm), have a Social Security number, and have an income below the following limits (for tax year 2015):

  • $47,747 ($53,267 married filing jointly) with three or more qualifying children
  • $44,454 ($49,974 married filing jointly) with two qualifying children
  • $39,131 ($44,651 married filing jointly) with one qualifying child, or
  • $14,820 ($20,330 married filing jointly) with no qualifying children.

Investment income must be no more than $3,400 for the tax year.

You must also meet all other requirements and your children, if you have any, must meet certain requirements.

In addition, you, your spouse, and any qualifying child must have a social security number and you must file as:

  • married filing jointly
  • head of household
  • qualifying widow(er), or
  • single.

You cannot get the EITC if your filing status is married filing separately.

There are also special rules regarding the EITC for:

  • military servicemembers
  • ministers and members of the clergy, and
  • those receiving disability benefits.

Child and Dependent Care Credit

The Child and Dependent Care Credit provides a tax credit for a portion of the expenses associated with the care of qualifying children under age 13, or for a disabled spouse or dependent.

The credit amount will be between 20% and 35% of up to $3,000 (for the care of one qualifying individual) or $6,000 (for two or more qualifying individuals) of the allowable expenses, depending on the amount of your adjusted gross income.

This tax credit is nonrefundable.

Basic Eligibility Requirements 

You must pay for the care (such as daycare or babysitting) so that you (and your spouse if you are married filing jointly) can work or seek work. The primary reason for the care must be to ensure the qualifying individual's well being and protection. The care provided can be within the home or outside the home.

A qualifying individual is:

  • a dependent child under 13 years old when the care is provided
  • a spouse who is physically or mentally incapable of caring for himself or herself and who has resided with you for more than half of the year, or
  • someone who is physically or mentally incapable of caring for himself or herself, who resided with you for more than half the year and is either: (1) your dependent or (2) could have been your dependent, but he or she is over the gross income limit or files a joint return, or you (or your spouse, if you file jointly) could have been claimed on another taxpayer’s return.

In order to qualify for the credit, the care provider cannot be:

  • your spouse
  • the parent of the qualifying individual
  • your child (under the age of 19), or
  • a dependent whose exemption you claim on your return.

The credit is not available to if your filing status is married filing separately. 

Adoption Credit

The Adoption Credit is a tax credit for qualified adoption expenses paid in order to adopt an eligible child. The credit may be allowed even if there aren’t any qualified expenses, if you adopt a child with special needs.

The maximum credit amount per child for 2015 is $13,400 per child. You can, however, carry any unused credit forward, which means that if you have an unused credit in one year, you can use it to reduce your taxes for the following year. You can do this for up to five years if your credit is more than your tax, or until the credit is used up, whichever happens first.

There are income limitations that reduce or eliminate the amount you can claim.

If you get employer-provided adoption assistance, there is an income exclusion. This means you may be able to exclude these benefits from your income, which is a tax benefit in addition to the tax credit. However, you cannot claim both a tax credit and an exclusion for the exact same expenses.

For example, if you pay $13,000 in qualified adoption expenses to adopt an eligible child and your employer reimburses you for $3,000 of those expenses (assuming your modified adjusted gross income is below the income limitations), you can exclude $3,000 from your gross income if you meet all other requirements. Your expenses for purposes of the Adoption Credit are then considered to be $10,000 ($13,000 minus $3,000 for your employer’s reimbursement). 

When you can claim the tax credit depends on:

  • when the adoption expenses are paid
  • whether the adoption is domestic or foreign, and
  • whether the adoption is finalized in the year.

This tax credit is nonrefundable.

Basic Eligibility Requirements

The adopted child must be under age 18, or is physically or mentally incapable of self-care.

The adoption expenses must be reasonable and necessary, and directly related to the adoption. For example, qualifying expenses generally include adoption fees, court costs, attorney fees, and traveling expenses (including meals and lodging). (This does not apply to taxpayers who pay expenses to adopt the child of a spouse.)

If you adopt a U.S. child with special needs (basically, a child that the state child welfare agency considers difficult to place for adoption), you can get the maximum amount of credit or exclusion for the year the adoption is final, even if you didn’t pay any qualified adoption expenses.

A special needs child (for purpose of the Adoption Credit) is a child that:

  • is a citizen or resident of the U.S. or its possessions when the adoption efforts started
  • a state has determined can’t (or shouldn’t) be returned to the parental home, and
  • the state has determined probably wouldn’t be adoptable without giving assistance to the adoptive family.

For purposes of the Adoption Credit, foreign children are not considered to have special needs. 

Child Tax Credit (and Additional Child Tax Credit)

The Child Tax Credit provides a credit of up to $1,000 for each child under age 17 that qualifies. The purpose of this credit is to offset the cost of raising children.

This tax credit is nonrefundable. However, if your Child Tax Credit is more than you owe in income taxes, you may be able to claim the refundable Additional Child Tax Credit, which allows you to receive a refund for the unused portion of your Child Tax Credit.

Note: You do not get the Additional Child Tax Credit because you have additional children. Instead, the credit is in addition to the regular Child Tax Credit.

The Child Tax Credit is set to expire at the end of 2017.

Basic Eligibility Requirements

The qualifying child must meet the following criteria:

  • Age. The child must be under age 17.
  • Relationship. The child must be your son, daughter, stepchild, foster child, adopted child, brother, sister, stepbrother, stepsister, or a descendant of one of these, including a grandchild, niece, or nephew.
  • Support. The child must not provide more than half of his or her own support.
  • Dependent. You have to claim the child as a dependent on your federal tax return.
  • Citizenship. The child has to be one of the following: a U.S. citizen, a U.S. national, or a U.S. resident alien.
  • Residence. The  child must live with you more than half of the year (subject to some exceptions).

The credit is reduced (phased out) if you have an adjusted gross income of $75,000 for single filers and heads-of-household; $110,000 if married filing jointly; and $55,000 if married filing separately.

The taxpayer must include the name and taxpayer identification number (usually the social security number) of the qualifying child on the tax return for the taxable year.

Credit for the Elderly or the Disabled

This tax credit allows elderly or disabled individuals and couples to reduce the amount of their income tax by the allowable credit.

This tax credit is nonrefundable.

Basic Eligibility Requirements

To be eligible for this tax credit, you must be a U.S. citizen or resident alien and either:

  • age 65 or older, or
  • under age 65, you retired on permanent and total disability, and you received taxable disability income for the tax year.

In addition, your adjusted gross income (or the total of your nontaxable Social Security, pensions, annuities, or disability income) must be under certain limits.

Summary of Federal Tax Credits Related to Health Care

Premium Tax Credit

One of the tax credits that you get in advance is the Premium Tax Credit. It reduces the cost of premiums for health insurance coverage from the federally facilitated or a state-based Health Insurance Marketplace (also called the health insurance "exchange" or “Obamacare exchange”).

This tax credit is refundable.

With this credit, payments are paid directly to the insurance company on your behalf, which lowers the out-of-pocket cost for your health insurance premium each month. 

The actual amount of the Premium Tax Credit you’ll receive depends on whether:

  • there is an increase or decrease in your household income
  • you get married or divorced
  • you give birth to or adopt a child
  • you get or lose eligibility for other health care coverage (such as eligible employer-sponsored coverage or government-sponsored coverage such as Medicare)
  • there are certain changes to your employment (including job loss, getting a job, or other changes), and/or
  • you move to a new address.

Basic Eligibility Requirements

To be eligible for the Premium Tax Credit, you must meet the following requirements.

  • You purchase your health care coverage through the Marketplace.
  • Your income must fall within a certain range.
  • You are not filing a Married Filing Separately tax return (unless you meet certain criteria for victims of domestic abuse and spousal abandonment).
  • You cannot be claimed as a dependent by someone else.
  • In the same month (coverage month), you, or a family member: enroll to get coverage through a Health Insurance Marketplace; you are unable to get affordable coverage through an eligible employer-sponsored plan that provides minimum value; and you’re not eligible for coverage from a government program, such as Medicaid, Medicare, CHIP, or TRICARE.

Also, you must pay the portion of the premiums not covered by the advance credit payments.

Health Coverage Tax Credit

The Health Coverage Tax Credit pays a significant portion of qualified health insurance premiums for eligible taxpayers and their qualified family members. (This credit was previously set to expire on January 1, 2014, but has been extended through 2019.)

This is a refundable credit.

Basic Eligibility Requirements

You may be able to claim the Health Coverage Tax Credit for qualifying health insurance coverage if you were:

  • an eligible trade adjustment assistance (TAA) recipient
  • an alternative TAA recipient
  • a reemployment TAA recipient
  • a Pension Benefit Guaranty Corporation pension payee (and are 55 years old or older), or
  • a qualifying family member.

Those individuals that can be claimed as a dependent on another person’s federal income tax return are ineligible for this tax credit.

Summary of Income and Savings Tax Credits

Retirement Savings Contributions Credit (Saver's Credit)

The “Saver’s Credit” is a credit to help low- to moderate-income workers save for retirement when contributing to an IRA or a retirement plan at work.

The credit applies to amounts voluntarily contributed to IRAs, 401(k) plans, and other similar workplace plans. Rollover contributions are not eligible for the Saver’s Credit.

This tax credit is in addition to any other tax savings that are applicable.

The credit amount is 50%, 20% or 10% of retirement plan or IRA contributions up to $2,000 ($4,000 if married filing jointly), depending on adjusted gross income. (There are income limits, which change each year.) This means the maximum amount of the credit is $1,000 ($2,000 for married couples).

The actual amount of the credit received can be quite a bit less though. (The credit amount is ultimately based on filing status, adjusted gross income, tax liability, and the amount contributed to qualifying retirement programs.)

This credit is nonrefundable.

Basic Eligibility Requirements

You must be:

  • at least 18 years old
  • not a full-time student, and
  • another person cannot claim you as a dependent on their tax return.

Foreign Tax Credit

This credit helps people avoid or reduce the double taxation that could happen when a taxpayer pays taxes to a foreign county on foreign source income and is also subject to U.S. tax on the same income.

You can take either a credit (which reduces your U.S. tax liability) or an itemized deduction (which reduces your taxable income) for those taxes. Usually a credit provides better tax savings. (The amount of the credit that you can claim is limited.)

This tax credit is nonrefundable.

Basic Eligibility Requirements

Generally, the tax must:

  • be a legal and actual foreign tax liability, and
  • must be imposed on you.

Also, you must have paid or accrued the tax, and it must be an income tax (or a tax that is in place of an income tax).

The bottom line is, ordinarily, only the following will qualify for the foreign tax credit:

  • income taxes paid or accrued to a foreign country or a U.S. possession (also called a U.S. territory), or
  • taxes paid or accrued to a foreign country or U.S. possession instead of an income tax.

Excess Social Security and Railroad Retirement Tax Act (RRTA) Tax Withheld

Some government employers aren’t required to withhold Social Security tax, unlike most employers.

Also, railroad employers are required to withhold Tier 1 Railroad Retirement Tax Act (RRTA) tax and Tier 2 RRTA tax. (Tier 1 RRTA provides benefits that are equivalent to Social Security and Medicare, and Tier 2 RRTA provides a private pension benefit.)

Basic Eligibility Requirements

This tax credit applies to those taxpayers who worked for more than one employer and:

  • had excessive Social Security tax withheld from their pay, or
  • railroad employees who had too much Tier 1 RRTA tax and Tier 2 RRTA tax withheld.

You might be able to claim the excessive amount as a credit against your income tax when you file your return.

This tax credit is refundable.

Credit for Tax on Undistributed Capital Gain

Mutual funds ordinarily distribute their capital gains to shareholders and report these gains to the IRS. However, a mutual fund might retain some of its capital gains and pay a tax on them.

You have to include in your income any amounts that regulated investment companies (otherwise known as a mutual fund) or real estate investment trusts (REITs) allocated to you as capital gain distributions, even in cases where you did not actually receive them.

Basic Eligibility Requirements

If a regulated investment company (mutual fund) or REIT paid a tax on your capital gain, you are allowed a credit for the tax since you effectively paid it.

This tax credit is refundable.

Nonrefundable Credit for Prior Year Minimum Tax

Taxpayers who are subject to the Alternative Minimum Tax (AMT) in a previous year may be entitled to a credit against his or her regular tax. You can only claim this credit in a year when you aren’t liable for AMT.

The AMT was created to make sure that wealthy taxpayers didn't get out of paying their fair share of taxes with loopholes. Basically this means that individuals and corporations that benefit from certain exclusions, deductions, or credits (loopholes) must pay at least a minimum tax amount.

This tax credit is nonrefundable.

Basic Eligibility Requirements

Those who paid AMT in one or more previous years are typically eligible to claim this tax credit.

Credit to Holders of Tax Credit Bonds

With a tax credit bond, the holder gets a tax credit instead of some or all of the interest on the bond.

This tax credit is nonrefundable.

Basic Eligibility Requirements

Holders of clean renewable energy bonds (that were issued before 2010), new clean renewable energy bonds, qualified energy conservation bonds, qualified school construction bonds, qualified zone academy bonds, and/or Build America Bonds may be eligible to claim this credit.

Summary of Federal Tax Credits Related to Education

Lifetime Learning Credit

The Lifetime Learning Credit provides up to $2,000 per year (20% of the first $10,000 of qualified education expenses—that is, amounts paid for qualified tuition and required enrollment fees at an eligible educational institution.)

The amount of the credit is phased out (gradually reduced) when your modified adjusted gross income reaches certain amounts. (These amounts change each year.)

This tax credit is nonrefundable.

Basic Eligibility Requirements 

To qualify, you, your dependent, or a third party must pay:

  • qualified education expenses for higher education, and
  • the education expenses are for an eligible student enrolled at an eligible educational institution.

What is an Eligible Educational Institution?

An eligible educational institution is an accredited college, university, vocational school, or other postsecondary educational institution. The educational institution must be eligible to participate in a federal financial student aid program administered by the U.S. Department of Education

In addition, you, your spouse, or a dependent listed on your tax return must be the eligible student.

American Opportunity Tax Credit

The American Opportunity Tax Credit is a credit for tuition, required enrollment fees, and course materials that applies to the first four years of post-secondary education at an eligible educational institution.

The maximum amount of the credit is $2,500 per eligible student per year. The amount of the credit is phased out when your modified adjusted gross income reaches certain amounts. (These amounts change each year.)

This tax credit is partially refundable. Specifically, 40% of this credit is refundable. (This means that if the credit reduces your taxes to zero, 40% of the remaining amount of the credit—up to $1,000—will be refunded.)

The American Opportunity Tax Credit is good through tax year 2017.

Basic Eligibility Requirements

In order to qualify for this credit, the student must:

  • be seeking a degree or other recognized education credential
  • be enrolled for at least one academic period (such as a semester, trimester, quarter, or any other period of study such as a summer school session) at least half time beginning in the tax year, and
  • not have completed the first four years of higher education at the beginning of the tax year.

In addition, the student cannot have a felony drug conviction at the end of the tax year.

You cannot claim this credit or the former Hope Credit for more than four tax years for the same particular eligible student.

Also, you cannot claim both the American Opportunity Tax Credit and the Lifetime Learning Credit for a particular student for the same tax year.

Summary of Tax Credits for Homeowners

Mortgage Interest Credit

This credit assists lower-income people afford a home. In order to get the credit, you must obtain a Mortgage Credit Certificate (MCC) from the appropriate state or local government agency. (The MCC is a certificate that allows you to claim a tax credit for some portion of the mortgage interest paid during the tax year.) Contact the appropriate agency before you get a mortgage and buy your home.

Typically, an MCC will only be issued in connection with a new mortgage for the purchase of your primary home. 

Those who itemize their deductions must reduce their home mortgage interest deduction by the amount of the mortgage interest credit claimed. Also, those who buy a home after 1990 using a MCC, and then sell that home within nine years, may have to repay all or part of the benefit received under this program.

This tax credit is nonrefundable.

Basic Eligibility Requirements

You must have been issued a qualified MCC by a state or local governmental unit or agency under a qualified mortgage credit certificate program.

The home to must be your main home and located in the jurisdiction of the governmental unit that issued the MCC.

If you paid the mortgage interest to a related person, then you can’t claim the credit.

Residential Energy Efficient Property Credit

Those who make their home more energy efficient may qualify for this tax credit. With the Residential Energy Efficient Property Credit, you can get credit for 30% of the expenses during the taxable year for qualified:

  • solar electric systems
  • solar water heaters
  • qualified fuel cell property (limited to $500 for each one-half kilowatt of capacity of the property, available for your main home only)
  • small wind energy property, and
  • qualified geothermal heat pumps.

This credit is nonrefundable and is available through 2016.

Basic Eligibility Requirements

The improvements must be on your home (which can be a house, houseboat, mobile home, cooperative apartment, condominium, or a manufactured home that conforms to Federal Manufactured Home Construction and Safety Standards) or second home (except for when it comes to fuel cell property), which is located in the U.S.

Nonbusiness Energy Property Credit

Qualified energy efficiency improvements (such as insulation, as well as energy-efficient windows, roof, and doors) installed on or in your main home might qualify for a tax credit that is worth 10% of the cost. The lifetime maximum limit is $500, with only $200 of this limit for windows. This credit expired December 31, 2014.

This tax credit is nonrefundable.

Basic Eligibility Requirements

The improvements must be on your main home (which can be a house, houseboat, mobile home, cooperative apartment, condominium, or a manufactured home that conforms to Federal Manufactured Home Construction and Safety Standards) that is located in the U.S.

Low-Income Housing Credit (for Owners of Low-Income Housing)

Owners of residential low-income rental buildings (that meet certain conditions) can get the Low-income Housing Credit, which can be taken over a ten-year credit period.

Basic Eligibility Requirements

For-profit developers and non-profit developers are eligible for the tax credit so long as certain criteria are met.

Summary of Federal Tax Credits Related to Certain Vehicles

Some of the more well-known tax credits are those regarding hybrid or electric cars.

Plug-In Electric Drive Motor Vehicle Credit

This credit is for those who purchase qualified plug-in electric drive vehicles. The credit amount is $2,500 to $7,500 depending on the battery capacity of the vehicle.

When a manufacturer sells 200,000 qualified vehicles for use in the U.S., the credit begins to phase out.

This tax credit is nonrefundable.

Basic Eligibility Requirements

For new vehicles with at least four wheels to be eligible, the vehicle must:

be significantly propelled by an electric motor that draws electricity from a battery that has a capacity of not less than 4 kilowatt hours and can be recharged from an external source of electricity, and

have a gross vehicle weight that is less than 14,000 pounds.

Plug-In Conversion Credit

You may be eligible for the Plug-In Conversion Credit if:

you converted a vehicle to a qualified plug-in electric drive motor vehicle before January 1, 2012, and

you began using it in the year that you claim the credit.

The credit is 10% of the cost of the conversion, with a limit of $4,000.

Alternative Fuel Vehicle Refueling Property Credit

People who buy cars that run on fuel other than gasoline may be eligible for this credit. It is applicable to the property used to fuel the vehicle.

According to the IRS, refueling “property” is property (but not a building or its structural components) that is used to store or dispense alternative fuel into the fuel tank of a motor vehicle propelled by the fuel. For example, storage tanks and dispensing equipment qualify. Recharging property used to recharge an electric car also qualifies for the credit.

This particular credit is limited to 30% of the cost of the property or $1,000 (whichever is less) for all qualified property at a location. (This applies to individuals, not businesses.) If the property is for business use, then the credit is the lesser of 30% of the cost of the property or $30,000.

This tax credit is nonrefundable.

Basic Eligibility Requirements

You must have purchased the alternative fuel vehicle refueling property before January 1, 2015, as well as started using it (“placed it in service”) in the year when you claim the credit.

For an alternative fuel to qualify for this credit, 85% of the volume must consist of one or more of the following: ethanol, natural gas, compressed natural gas, liquified natural gas, liquefied petroleum gas, or hydrogen. Mixtures of biodiesel, diesel, and kerosene with 20% or more volume derived from a biodiesel fuel also qualify. Electricity also qualifies as an alternative fuel for the purposes of this credit.

In addition, the property must be predominantly inside the United States. And, if the property is not business or investment use property, it must be installed on the property used as your main home.

Qualified Fuel Cell Motor Vehicle Credit (Alternative Motor Vehicle Credit)

People who bought a fuel cell motor vehicle may be eligible for this credit.

In most cases, you can rely on the manufacturer’s (or domestic distributor, in the case of a foreign manufacturer) certification to the IRS that a particular make, model, and model year vehicle qualifies for the credit (and the amount of the credit) unless the IRS publishes an announcement that the certification for that specific make, model, and model year has been withdrawn.

Usually, the credit amount will be 100% of the manufacturer's (or domestic distributor's) certification to the IRS of the maximum credit allowable.

This tax credit expired for vehicles purchased after 2014. (For example, this means that if you purchased a qualifying vehicle prior to 2015, but placed it in service during 2015, you might still be eligible to claim the credit for 2015.)

This tax credit is nonrefundable.

Basic Eligibility Requirements

To be eligible, all of the following must apply.

You must own the vehicle.

You started using the vehicle (placed it in service) in the tax year.

The use of the vehicle originally began with you.

You got the vehicle to use or to lease to others (not for resale).

The vehicle is used primarily in the U.S.

To qualify for this credit, the vehicle must:

have at least four wheels, and be propelled by power derived from one or more cells that convert chemical energy directly into electricity by combining oxygen with hydrogen fuel (and meet certain additional requirements).

These aren't the only tax credits available to you. In fact, many states also offer tax credits. Check your state’s official webpage to find out about available tax credits where you live.

Where to Get Additional Information About Federal Tax Credits

The rules about claiming federal tax credits, eligibility requirements, and income limits, among other things, are complicated. Before you claim any federal tax credit, carefully review all eligibility requirements for that credit.

Go to the IRS website to find the latest information about federal tax credits and learn more about whether you’re eligible to claim any particular credits.