Tax credits vs. tax deductions
A tax credit reduces your tax liability, while a tax deduction reduces the taxable income used to calculate your tax.
| $1,000 Tax Credit | $1,000 Tax Deduction | |
|---|---|---|
| What it reduces | The tax you owe | The taxable income you’re taxed on |
| Your savings | $1,000 | $220 at a 22% marginal tax rate |
| Depends on your tax bracket? | No | Yes, higher bracket saves more |
Source: Internal Revenue Service
A credit is worth the same amount no matter your tax bracket. For example, a $1,000 credit lowers your tax by $1,000 whether you’re in the 12% bracket or the 37% bracket.
On the other hand, deductions depend on your marginal tax rate, so an equal-sized deduction usually saves you less. Keep in mind the amount you can claim still depends on your income, since many credits and deductions phase out above certain income (AGI) thresholds.
For deductions, you can either claim the standard deduction or itemized deductions. Typically, filers claim the standard deduction unless total itemized deductions exceed the standard deduction amount for their filing status.
Types of tax credits
The type of credit (refundable, nonrefundable, or partially refundable) determines what happens if the credit is greater than your tax bill.
| Type | How it works | Example credit |
|---|---|---|
| Refundable | Can reduce your tax below zero, with the remaining amount paid out as a refund. | Earned Income Tax Credit (EITC) |
| Nonrefundable | Can reduce your tax to zero, but any leftover credit is forfeited and isn’t refunded. | Lifetime Learning Credit |
| Partially refundable | Reduces your tax, and a limited portion of any remaining credit may be refunded. | Child Tax Credit; American Opportunity Tax Credit |
Source: Internal Revenue Service (1, 2)
Eligibility requirements
The requirements for each credit vary, but typically, eligibility depends on factors such as your:
- Income
- Filing status
- Dependents
- Expenses
Common tax credits
Common credits include:
- Child Tax Credit (CTC): Up to $2,200 per qualifying child, and partially refundable through the Additional Child Tax Credit (ACTC), which can be as much as $1,700 per child.
- Earned Income Tax Credit (EITC): A refundable credit for low-to-moderate-income workers and families; the amount varies by income, family size, and filing status, but the maximum for 2026 is $8,231.
- Education credits: The American Opportunity Tax Credit (AOTC) is worth up to $2,500 per student and is 40% refundable (up to $1,000), while the Lifetime Learning Credit (LLC) is worth up to $2,000 per return and is nonrefundable.
- Child and Dependent Care Credit (CDCC): Helps offset the cost of care for a qualifying child or dependent while you worked or looked for work. The credit is a percentage (20% to 50%) of your care expenses — up to $1,500 for one person or $3,000 for two or more for 2026.
- Premium Tax Credit (PTC): A refundable credit that helps pay for health coverage bought through the Health Insurance Marketplace.
Keep in mind, some credit amounts are adjusted annually for inflation.
How to claim a tax credit on your tax return
You claim credits when filing Form 1040 and required schedules or forms for specific credits. To claim credits on your return, you’ll need to:
- Confirm the eligibility rules.
- Gather records such as Social Security numbers, tuition statements, or child care receipts.
- Complete Form 1040 yourself, or use tax software or a tax professional to help you calculate your available credit, apply income limits, and complete your tax return.
