Tax Credits: What They Are and How They Work in 2025

Tax credits are the gold nuggets of the tax world. Qualifying for one feels better than finding $100 in your pants pocket. Here’s a brief look at how they work and an overview of the most common ones you may qualify for.

» Jump to: Popular credits for taxes

What is a tax credit?

A tax credit is a dollar-for-dollar reduction of a taxpayer's bill. This can reduce the taxes owed or, in some cases, increase a refund amount.

Tax credits are offered on both the federal and state levels to incentivize certain actions, such as purchasing an electric vehicle, or to offset the cost of certain expenses (e.g., raising or adopting a child). To qualify, taxpayers usually must meet a strict set of criteria relevant to that credit.

A tax credit differs from a tax deduction. Deductions lower your taxable income, whereas tax credits lower how much you owe in taxes.

» Dive deeper: Tax deductions vs. tax credits

How do tax credits work?

Tax credits come in three categories: refundable, partially refundable and nonrefundable. These classifications tell you how the credit will be applied to the taxes you owe. The majority of tax credits are nonrefundable. Good tax software should be able to walk you through which credits you may qualify for and how to claim them. Here's a breakdown of each type.

Refundable tax credit

Refundable tax credits are highly sought-after tax benefits. And that's because claiming one can not only reduce your taxes owed but also result in a refund. If you owe fewer taxes than the credit amount, the overage will be returned to you in the form of a refund after you file your tax return. For example, if you owe $500 and qualify for a $700 refundable credit, you'll get that extra $200 refunded to you by the IRS.

Partially refundable tax credit

Partially refundable credits can lower your tax liability by the corresponding credit amount, and if your tax bill is lower than the credit amount, you may be able to get a partial refund for any remaining overage — but only up to a certain amount. For example, if the credit is worth $1,000, but only $500 of that is refundable, you may either have your tax liability lowered by $1,000 or get up to $500 back as a refund if taxes owed are less than the credit amount.

Nonrefundable tax credit

Nonrefundable tax credits reduce your tax liability by the corresponding credit amount. In other words, if you qualify for a $500 nonrefundable credit, your taxes owed are reduced by $500. Once you zero out your taxes owed, though, you won't get any overage of the unused tax credit back as a refund.

» Still need to file? See our top picks for this year's best tax software.

Popular tax credits for 2025 (taxes filed in 2026)

Some of the most popular tax credits fall into five categories.

These tax credits apply to tax returns that will be due by April 2026. Keep in mind that the sections below are just summaries. Tax credits have many rules, so it's a good idea to consult a tax professional if you're unsure whether you're eligible.

1. Tax credits for low-to-middle-income households

2. Tax credits for people with kids

3. Tax credits for investing in retirement

4. Tax credits for education

5. Tax credits for green purchases

Earned income credit

This earned income tax credit could get you up to $8,046 when you file in 2026, depending on your tax filing status and how much you make.

• You don't need to have children to qualify — but generally, the more children you have, the higher your potential credit amount.

• If your AGI is $68,675 or less in 2025, it’s something to look into. However, if you have more than $11,950 of investment income, dividends, capital gains and a few other things in 2025, you won’t qualify.

Premium tax credit

The premium tax credit is a refundable benefit for low-to-middle-income taxpayers that can help offset the cost of health insurance premiums from qualified health insurance marketplace plans. The credit is also unique in that taxpayers can choose to take the credit in advance to help manage premium payments throughout the year or wait to claim the credit until they file their tax returns.

Child tax credit

The child tax credit could get you up to $2,200 per kid, with $1,700 being potentially refundable through the additional child tax credit. You may qualify for the full credit only if your modified adjusted gross income is under:

• $400,000 for those married filing jointly and $200,000 for all other filers.

• The higher your income, the less you’ll qualify for.

Child and dependent care credit

Generally, the child and dependent care credit covers up to 35% of up to $3,000 of child care and similar costs for a child under 13, spouse or parent unable to care for themselves, or another dependent so you can work — and up to $6,000 of expenses for two or more dependents.

• The percentage of allowable expenses decreases for higher-income earners — and therefore, the value of the credit also decreases.

• Payments made out of a dependent-care flexible spending account or other tax-advantaged program at work may reduce your credit.

Adoption credit

This covers up to $17,280 in adoption costs per child, with up to $5,000 being refundable.

• The credit begins to phase out at $259,190 of modified adjusted gross income, and people with AGIs of $299,190 and above don’t qualify.

• Also, you can’t take the credit if you’re adopting your spouse’s child^[0]

  Internal Revenue Service. Topic No. 607, Adoption Credit and Adoption Assistance Programs. Accessed Oct 16, 2023.

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• People who adopt children with functional needs can get up to the full credit amount, even if their actual expenses were less.

» MORE: Learn how to get an adoption taxpayer identification number (ATIN)

The saver’s credit

The saver's credit runs 10% to 50% of up to $2,000 in contributions to an IRA, a 401(k), a 403(b) or certain other retirement plans ($4,000 if filing jointly). The percentage depends on your filing status and income, but generally, it's something to look at if your AGI in 2025 is $79,000 or less if married filing jointly, $59,250 if head of household and $39,500 if single.

» Want another way to cut your tax bill? You can reduce your taxable income by contributing to a traditional IRA

American opportunity credit

The American opportunity tax credit runs up to $2,500 per student for tuition, activity fees, books, supplies and equipment during the first four years of college. It is partially refundable, so if the credit lowers your tax bill to $0, you can get up to 40% (limited to $1,000) back as a refund.

• The student must be enrolled at least half-time and can’t have any felony drug convictions.

• Parents or qualified caretakers can take the credit if they qualify and claim the student as a dependent on their return.

Lifetime learning credit

The lifetime learning credit can get up to $2,000 for tuition, activity fees, books, supplies and equipment for undergraduate, graduate or even nondegree courses at accredited institutions.

• Unlike the American opportunity credit, there’s no workload requirement.

• The $2,000 limit is per return, not per student, so the most you can get back is $2,000 regardless of how many students you pay expenses for.

• You can claim both the American opportunity credit and the lifetime learning credit on the same tax return, but you can't claim both for the same student.

Residential energy tax credits

The purchase of energy-efficient home upgrades, such as windows, doors, and heat pumps, made through Dec. 31, 2025, could be worth up to $3,200 through the energy efficient home improvement tax credit. This tax credit will no longer be available starting in 2026.

The residential clean energy tax credit (sometimes called the solar tax credit for short) can get you up to 30% of the cost of certain expenses related to solar energy systems, including solar water heaters, solar panels, battery storage technology and other home improvements throughout December 2025. Like the energy efficient home improvement credit, this benefit will also be eliminated in 2026.

Electric vehicle tax credit

The electric vehicle tax credit, also known as the clean vehicle credit, could get you up to $7,500 for buying a new electric vehicle and up to $4,000 for the purchase of a used one — but only if your vehicle was placed in service by Sept. 30, 2025. This credit will no longer be available for cars purchased after this date.

» MORE: Popular tax deductions and tax breaks