A deduction reduces the income you are taxed on. A credit reduces the tax itself, dollar for dollar, which makes a $1,000 credit worth far more than a $1,000 deduction to everyone except the very highest earners. Refundable credits go further still: they can pay out even when your tax is already zero.
The Earned Income Tax Credit
The EITC is the largest anti-poverty programme in the tax code and the most persistently under-claimed. The IRS estimates that a significant share of eligible taxpayers do not claim it each year, most often because they were not required to file at all and therefore did not.
It is available to working people with low to moderate income, with a much larger credit for those with qualifying children, and a smaller one for workers without children within a specific age range. Eligibility depends on earned income, investment income limits and filing status, and the amounts change every year. Check with the IRS EITC page and its assistant tool.
The Child Tax Credit
Available for each qualifying child under 17 who has a valid Social Security number and lives with you for more than half the year. Part of it is refundable through the Additional Child Tax Credit, limited by a percentage of earned income above a floor. The credit phases out at higher incomes. Details are on the IRS Child Tax Credit page, and our income tax estimator applies the phase-out for you.
The commonly missed relative is the Credit for Other Dependents, a smaller non-refundable credit for dependents who do not qualify for the child credit: a 17 or 18 year old, a college student you support, or an elderly parent living with you.
Child and Dependent Care Credit
This one is for care costs that let you work or look for work: daycare, before and after school programmes, day camp, or care for a disabled spouse or parent. Overnight camp does not count. You need the provider's name, address and taxpayer identification number, which is why the document checklist asks for it specifically.
Note the interaction with a dependent care flexible spending account at work: money run through the FSA cannot also generate the credit, and for many households one is clearly better than the other. It is worth modelling rather than guessing.
Education credits
Two credits, and you cannot claim both for the same student in the same year.
- The American Opportunity Tax Credit applies to the first four years of undergraduate study, is partly refundable, and requires at least half-time enrolment.
- The Lifetime Learning Credit has no year limit and no enrolment minimum, which makes it the one for graduate study, part-time courses and job-related skills training. It is not refundable.
Both are explained in the IRS overview of education credits. The number on Form 1098-T is frequently not the number you should use: what matters is qualified expenses actually paid, net of scholarships, and the form often reports amounts billed instead.
Saver's Credit
A credit worth a percentage of what you contributed to a retirement account, for taxpayers under an income limit. It sits on top of the deduction a traditional contribution already gives you, which means the same $1,000 into an IRA can reduce taxable income and generate a credit. It is one of the least known provisions in the code and it is claimed by a fraction of those eligible. See the IRS page on the retirement savings contributions credit.
Premium Tax Credit
If anyone in your household had marketplace health coverage, Form 1095-A drives a reconciliation on the return between the advance credit paid to the insurer and what your actual income entitled you to. Income lower than projected means money back; higher means repayment, sometimes a large one. Filing without the form stalls the return, and a mid-year income change is the moment to update the marketplace rather than wait for April.
Home energy credits
Credits for qualifying home energy improvements and clean energy property change with legislation more often than any other area here, including their expiry dates. If you made improvements, check the current position on the IRS page for home energy tax credits before assuming last year's rules still apply, and keep the manufacturer certification with your records.
How credits actually get missed
- Not filing at all, which forfeits every refundable credit automatically.
- Not mentioning a life change: a birth, a move, a parent moving in, a child starting college.
- Missing documentation, particularly the childcare provider's tax ID and Form 1095-A.
- Assuming last year's answer still applies after an income change that crossed a phase-out.
If you think you missed one in a prior year, you can usually still fix it. See how to amend a tax return.