Tax season is underway. And while many Americans are eagerly anticipating a refund, some are dreading a large tax bill.
In fact, the average American spends a whopping $325,561 in income taxes over a lifetime, according to an analysis by accounting software company DancingNumbers.
And an AP-NORC poll found that two-thirds of Americans believe they pay too much in federal income taxes.
What Is a Tax Credit?
A tax credit is an amount of money that people can subtract directly from the amount they owe in income taxes.Federal and state governments may provide tax credits to individuals or businesses engaging in certain activities deemed important, or to ease the financial burden on low-to-moderate-income individuals for doing things such as saving for retirement and raising children.
Refundable: This is the most beneficial type of tax credit. If a refundable tax credit reduces your tax liability to below zero, you’ll get the remaining balance as a cash refund. For instance, let’s say you owe $1,000 in income taxes. And you claim a $2,000 tax credit. As a result, you owe no income tax and you get $1,000 as a refund.
Nonrefundable Tax Credit: If your nonrefundable tax credit reduces your tax liability to below zero, you won’t get the difference as a refund. It can still potentially reduce your tax liability to zero, however.
Partially Refundable Tax Credit: If a partially refundable tax credit cuts the tax you owe to below zero, a portion of the remaining balance may be refundable.
For example, let’s say you owe $2,000 in income tax. And you claim a $3,000 partially refundable tax credit. A flat dollar amount or percentage of the remaining $1,000 credit may be refundable, depending on the nature of the specific tax credit.
There are a handful of different federal and state tax credits out there. Let’s take a look at some of the most beneficial ones. These credits would apply to tax year 2024 (the taxes you file in 2025).Earned Income Tax Credit
The Earned Income Tax Credit (EITC) is a refundable tax credit designed for low-to-moderate-income workers. For tax year 2024, the EITC can range from $632 to $7,830. This depends on your filing status and the number of children you have. Generally, the more children you’re raising, the higher the tax credit.
| # of Children | Max credit | Max income single | Max income filing jointly |
| 0 | $632 | $18,591 | $25,511 |
| 1 | $4,213 | $49,084 | $56,004 |
| 2 | $6,960 | $55,768 | $62,688 |
| 3 | $7,830 | $59,899 | $66,819 |
It’s important to note that you won’t qualify for the EITC if you have investment income of $11,600 or more.
To qualify for the EITC, you must have earned income of more than $1, but below the applicable limits. Earned income includes the following.- Wages
- Salary
- Tips
- Any other taxable pay from employers
- Income from self-employment or side jobs/gig work
Child Tax Credit
The child tax credit (CTC) was implemented to help low-to-moderate-income families with children. It allows tax filers to claim $2,000 per eligible child. And up to $1,700 is refundable through the additional child tax credit (ACTC).Child and Dependent Care Credit
The child and dependent care credit (CDCC) was designed to help parents and caregivers work while offsetting certain expenses related to the care of a child under 13, or a spouse or other dependent unable to care for themselves.The CDCC amount is 20 percent to 35 percent of up to $3,000 in care expenses for one eligible dependent, or $6,000 for two or more eligible dependents.
In other words, the maximum credit is $1,050 for one dependent or $2,100 for two or more dependents. There’s no income cap for this credit. But those with AGI of more than $43,000 would be eligible for only 20 percent of expenses, provided they meet all other requirements.
- Nursery school
- Preschool (below kindergarten)
- Pre- and after-school care
- Dependent care center
- Paid care provider
- Transportation for dependent
- Expenses related to kindergarten and above grades
- Tutoring
- Summer school
- Sleep-away camp
Saver’s Credit
Officially called the retirement savings contributions credit, the saver’s credit was designed to help ease the tax burden on low-to-moderate income people saving money in retirement plans like 401(k)s, 403(b)s and individual retirement accounts (IRA).It can benefit you if your adjusted gross income (AGI) was $38,250 or less ($76,500 or less if married filing jointly)
Premium Tax Credit
The premium tax credit (PTC) is a refundable credit meant to help people with low-to-moderate income offset the costs of premiums related to health insurance plans purchased through the public marketplace. Those eligible can take the credit in advance by lowering their current premiums or take the total credit when they file their taxes.American Opportunity Tax Credit
The American opportunity tax credit is meant to help college students offset the costs of going to school.- Tuition
- Fees
- Books, supplies, and equipment required for enrollment in the first four years of college
The Bottom Line
There are plenty of federal and state tax credits that can lower the amount you owe on income taxes this year. Some may lower your tax liability to zero and even provide you with refundable money. It’s important to make sure you’re aware of the credits you qualify for.You can find some key tax credits if you’re a low-to-moderate-income worker, raising children, saving for retirement, or attending college.
