Tax Credits - What to Know and Why Credits are Better than Deductions
- Todd Phillips
- Apr 7
- 4 min read
When it comes to paying less tax, credits are far better than deductions. Full stop.
While deductions reduce your taxable income, credits reduce your actual tax bill. That’s not just semantics—it’s math.
Let’s say you’re in the 24% federal bracket. A $1,000 deduction saves you $240. A $1,000 tax credit saves you $1,000. That’s why credits are often called “dollar-for-dollar” tax savings. And when you stack credits correctly, they can erase your tax bill altogether.
The Two Flavors of Credits
Before diving into examples, it helps to understand that credits come in two main types:
Nonrefundable Credits: These can reduce your tax bill to zero, but not below. If your total tax liability is $800 and you have a $1,000 nonrefundable credit, you just use $800. The rest disappears.
Refundable Credits: These go further. If your tax bill is zero and you have a $1,000 refundable credit, the IRS cuts you a check for the full $1,000.
Some credits are hybrids—partly refundable, partly not.
Common Individual Tax Credits
Here are a few credits individual taxpayers should know about, along with how they generally work:
Child Tax Credit (CTC)
Amount: Up to $2,000 per child under 17.
Refundable?: Partially. Up to $1,600 may be refundable (as of 2024).
Income Phaseout: Begins at $400,000 for joint filers.
This is one of the most widely claimed credits and often misunderstood. The CTC phases out fast, so high-income taxpayers may not benefit.
Child and Dependent Care Credit
Purpose: Helps cover daycare or babysitter costs so you can work.
Amount: Up to 35% of $3,000 for one child or $6,000 for two or more.
Refundable?: No.
Income Phaseout: Reduces to 20% of eligible expenses for incomes above $43,000.
Often missed by dual-income households who pay for after-school care or summer day camps.
American Opportunity Credit (AOC)
Who It’s For: Undergrad students in their first four years of college.
Amount: Up to $2,500 per student.
Refundable?: Partially. Up to $1,000 refundable.
Phaseout: Begins at $80,000 (single) or $160,000 (joint).
Covers tuition, fees, and course materials. The AOC is one of the few education credits that’s partially refundable.
Lifetime Learning Credit (LLC)
Who It’s For: Anyone taking college courses or continuing education.
Amount: 20% of up to $10,000 of expenses = $2,000 max.
Refundable?: No.
Phaseout: Starts at $80,000 (single) or $160,000 (joint).
Unlike the AOC, the LLC has no limit on years claimed—but no refund either. Great for grad students or mid-career professionals taking classes.
Saver’s Credit
Who It’s For: Low- to moderate-income taxpayers contributing to a retirement account.
Amount: 10%–50% of up to $2,000 in contributions.
Refundable?: No.
Income Limit: Phases out at $76,500 (married) or $38,250 (single).
This one rewards taxpayers for contributing to a 401(k), IRA, or similar plan—but it flies under the radar.
Premium Tax Credit (PTC)
Who It’s For: Individuals buying health insurance on the marketplace.
Amount: Varies based on income and cost of coverage.
Refundable?: Yes.
Income Limit: Generally available if income is between 100%–400% of the federal poverty line.
A major subsidy that can make ACA plans more affordable—especially for early retirees or gig workers.
Below is a list of credits (no guarantee I caught them all, but I think I covered most of them).
Individual Tax Credits
Child Tax Credit (CTC)
Additional Child Tax Credit (ACTC)
Child and Dependent Care Credit
American Opportunity Credit (AOC)
Lifetime Learning Credit (LLC)
Saver’s Credit (Retirement Savings Contributions Credit)
Earned Income Tax Credit (EITC)
Premium Tax Credit (PTC)
Adoption Credit
Foreign Tax Credit (individual)
Residential Clean Energy Credit (formerly Residential Energy Efficient Property Credit)
Energy Efficient Home Improvement Credit
Electric Vehicle (EV) Credit (Clean Vehicle Credit)
Plug-in Electric Drive Vehicle Credit (pre-2023 vehicles)
Health Coverage Tax Credit (HCTC)
Credit for the Elderly or Disabled
Credit for Excess Social Security and RRTA Tax Withheld
Education Credits (AOC & LLC combined on Form 8863)
Credit for Prior Year Minimum Tax
DC First-Time Homebuyer Credit (limited availability)
Mortgage Interest Credit (for recipients of a Mortgage Credit Certificate – MCC)
Recovery Rebate Credit (COVID-related, no longer active for current years)
Business Tax Credits
General Business Credit (umbrella for multiple credits)
Work Opportunity Tax Credit (WOTC)
Research & Development (R&D) Credit
Disabled Access Credit
Credit for Employer-Provided Childcare
Credit for Small Employer Pension Plan Startup Costs
Retirement Plan Auto-Enrollment Credit
Credit for Paid Family and Medical Leave
Employer Credit for Paid Sick and Family Leave (COVID-era)
Small Business Health Care Tax Credit
Credit for Increasing Research Activities (subset of R&D Credit)
Low-Income Housing Credit
New Markets Credit
Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips
Renewable Electricity Production Credit
Investment Credit (includes solar, fuel cell, and other energy property)
Energy Efficient Home Credit (for eligible homebuilders)
Alternative Motor Vehicle Credit
Alternative Fuel Vehicle Refueling Property Credit
Carbon Oxide Sequestration Credit (45Q Credit)
Credit for Employer Differential Wage Payments
Credit for Small Employer Health Insurance Premiums
Indian Employment Credit
Employer Credit for Social Security Tax on Employee Tips
Credit for Employer-Provided Apprenticeship Programs (state-specific)
Empowerment Zone Employment Credit
Railroad Track Maintenance Credit
Biodiesel and Renewable Diesel Fuel Credit
Distilled Spirits Credit
Film and Television Production Credit (state-level or federal, when active)
Opportunity Zone Investment Credit (through deferral/exclusion mechanism)
Orphan Drug Credit
Clinical Testing Credit for Rare Diseases
Credit for Holding Clean Vehicles for Resale (for dealers under Inflation Reduction Act rules)
Energy Credit (Section 48)
