Tax credits are powerful tools in a taxpayer's arsenal, offering direct reductions in the amount of tax owed or increasing the amount of refund received. Unlike deductions, which reduce taxable income, tax credits provide a dollar-for-dollar reduction in actual tax liability.
With several recent tax law changes, including updates under the One, Big, Beautiful Bill Act (OBBB), understanding available credits is more important than ever.
Understanding Tax Credits
Tax credits are incentives provided by federal and state governments to encourage certain behaviors or activities deemed beneficial to society. They directly offset the amount of tax owed, resulting in a lower tax bill or a higher refund.
Tax credits are generally classified as either refundable or nonrefundable.
- Refundable credits can generate a refund even when the credit exceeds the amount of tax owed.
- Nonrefundable credits can reduce a taxpayer's liability to zero but generally cannot produce a refund.
Common Individual Tax Credits
Earned Income Tax Credit (EITC)
Designed to assist low- to moderate-income workers, the EITC remains one of the most valuable refundable credits available.
For tax year 2026, the maximum EITC amounts are:
- No qualifying children - Up to $664
- One qualifying child - Up to $4,427
- Two qualifying children - Up to $7,316
- Three or more qualifying children - Up to $8,231
Eligibility depends on earned income, filing status, investment income, and the number of qualifying children.
Child Tax Credit (CTC)
The OBBB permanently enhanced the Child Tax Credit beginning with tax year 2025.
For tax year 2026:
- The credit is worth up to $2,200 per qualifying child under age 17.
- Up to $1,700 per child may be refundable through the Additional Child Tax Credit.
- Income phaseouts remain at:
- $200,000 for Single, Head of Household, and Married Filing Separately taxpayers.
- $400,000 for Married Filing Jointly taxpayers.
- The $500 Credit for Other Dependents remains available for qualifying dependents who do not meet the Child Tax Credit requirements.
American Opportunity Tax Credit (AOTC)
Taxpayers paying for higher education may qualify for the American Opportunity Tax Credit, which helps offset the cost of tuition, fees, and required course materials for eligible students.
For tax year 2026:
- The credit is worth up to $2,500 per eligible student.
- Up to 40% of the credit, or $1,000, may be refundable.
- The credit is generally available for the first four years of postsecondary education.
- Income phaseouts begin at:
- $80,000 for Single, Head of Household, and Qualifying Widow(er) filers.
- $160,000 for Married Filing Jointly taxpayers.
The student must be enrolled at least half-time in a program leading to a degree or other recognized credential.
Lifetime Learning Credit
Taxpayers pursuing higher education may qualify for the Lifetime Learning Credit, which provides a credit of up to $2,000 per tax return for qualified tuition and educational expenses.
Unlike some education credits, there is no limit on the number of years the credit can be claimed.
Homeownership and Energy Credits
Mortgage Interest Credit
Available to eligible homeowners who receive a Mortgage Credit Certificate (MCC) from a state or local government agency, this credit helps offset mortgage interest costs.
Residential Energy Credits
Taxpayers considering energy-efficient home improvements should be aware that several clean energy incentives were modified under OBBB.
Some previously available residential clean energy credits are being phased out or have earlier expiration dates. Taxpayers planning solar, geothermal, or other energy projects should consult a tax professional to determine current eligibility before making significant purchases.
Business Tax Credits
Research and Development (R&D) Credit
The R&D Credit rewards businesses for investing in innovation, product development, and technological advancement.
Recent legislation restored more favorable treatment for certain domestic research expenditures, potentially increasing tax benefits for qualifying businesses.
Work Opportunity Tax Credit (WOTC)
Businesses may receive a tax credit for hiring individuals from targeted groups, including:
- Veterans
- Long-term unemployment recipients
- Certain public assistance recipients
- Ex-felons
Small Business Health Care Tax Credit
Eligible small businesses that provide health insurance coverage for employees may qualify for a credit covering a portion of premiums paid.
Maximizing Tax Credits
To make the most of available tax credits:
- Review eligibility requirements carefully.
- Maintain thorough records supporting credit claims.
- Monitor legislative changes, as tax laws continue to evolve.
- Consult a qualified tax professional to identify credits that apply to your specific situation.
Final Thoughts
Tax credits can substantially reduce taxes owed and increase refunds. Whether you're a working family, a student, a homeowner, or a business owner, understanding these incentives can lead to meaningful tax savings.
With changes under the One, Big, Beautiful Bill Act, taxpayers should review their tax strategies annually to ensure they are taking advantage of every available opportunity.
As always, consult with a qualified tax professional for advice tailored to your individual circumstances.