Tax credits vs. tax deductions
A deduction and a credit both lower your tax, but at different points in the calculation. A deduction, like the standard deduction or itemized deductions, is subtracted from income, so it shrinks taxable income and is worth the deduction times your marginal tax rate. A credit is subtracted from the tax itself, after the brackets have done their work.
That makes a credit worth the same to almost everyone who can use it. A $1,000 deduction saves $120 in the 12% bracket and $370 in the 37% bracket; a $1,000 credit saves $1,000 in both, provided the filer owes at least that much. Deductions are often far larger, though, so which one is worth more depends on the amounts, not the label.
Names can mislead. The senior deduction for people 65 and older is a deduction, not a credit, so a retiree in the 12% bracket saves $720 from its full $6,000, not $6,000.
Refundable, nonrefundable and partly refundable credits
The order of the return explains the difference. You first figure income tax on taxable income. Nonrefundable credits then reduce that tax, in a set order, until it reaches zero, and any part left over is generally lost. Refundable credits come last and are treated like tax already paid, alongside withholding and estimated payments, so whatever exceeds the tax is paid to you as a refund.
Some credits sit in between. The Child Tax Credit is worth up to $2,200 per child for 2026, of which up to $1,700 per child is refundable. The American Opportunity credit for college costs is 40% refundable. The adoption credit has a refundable portion of up to $5,120 for 2026.
Refundability matters most to households whose income tax is small next to the credit. For a household that owes plenty of tax, a refundable and a nonrefundable credit of the same size are worth the same.
The main federal tax credits for 2026
Most individual credits fall into six groups: raising children, working on a low income, paying for college, saving for retirement, buying health coverage and avoiding double tax on the same income. The table lists the ones households claim most, with 2026 figures.
For families, the Child Tax Credit and the child and dependent care credit do most of the work. The earned income tax credit rewards work at low and moderate earned income, the Saver’s Credit rewards retirement contributions, and the premium tax credit lowers the cost of Marketplace health insurance. The foreign tax credit, which offsets tax already paid abroad, often shows up for investors who hold international funds in a taxable brokerage account.
Each credit has its own form, income test and definition of income, so qualifying for one says little about the others.
What changed for credits in 2025 and 2026
Two laws and one expiration reshaped the list, so figures from guides written before mid-2025 can be wrong for 2026 returns. The One Big Beautiful Bill Act, signed in July 2025, enlarged or made permanent most family credits, ended the household clean energy credits years ahead of schedule and tightened premium tax credit repayment. The enhanced premium subsidies expired on their own after 2025. And the SECURE 2.0 Act of 2022 had already scheduled the Saver’s Credit to give way to a Saver’s Match. The main changes for individuals:
- Child Tax Credit: $2,200 per child from 2025, now permanent and indexed; the child, and you or at least one spouse on a joint return, need a valid Social Security number.
- Child and dependent care credit: from 2026, 50% of eligible costs for AGI up to $15,000, at least 35% until AGI passes $75,000 ($150,000 joint), and never below 20%.
- Clean energy: the new clean vehicle credit ended for vehicles acquired after September 30, 2025, and the residential clean energy credit for spending after December 31, 2025.
- Premium tax credit: with the enhanced subsidies gone, the 400%-of-poverty cap is back for 2026, and excess advance credit must be repaid in full.
- Saver’s Credit: 2026 is the last year it covers retirement contributions; a Saver’s Match deposited into your account replaces it from 2027.
Common mistakes with tax credits
Most mistakes come from treating a credit as a fixed amount. Its value depends on the whole return: who you can claim, what you earned, what you paid, your income under that credit’s own definition, and how much tax is left after the credits that come before it. That makes credits most fragile in years when income swings, as it often does around early retirement, a job change or a large Roth conversion. These errors change the answer most often:
- Counting a nonrefundable credit as cash when you owe little income tax.
- Ignoring income tests: a conversion, a capital gain or a bonus can shrink or erase a credit in the same year.
- Missing cliffs: the Saver’s Credit tiers and the 400% premium tax credit limit cut benefits abruptly rather than gradually.
- Confusing credits with deductions, which are worth only your marginal rate.
- Relying on last year’s rules: several credits ended in 2025, and the Saver’s Credit changes in 2027.
Illustrative numbers
The same $2,000 as a nonrefundable credit, a refundable credit and a deduction
- Tax before credits
- Income tax figured on taxable income from the brackets and capital gains rates
- Nonrefundable credits
- Credits that can cut tax to zero but not below, such as the Saver’s Credit
- Refundable credits
- Credits paid in full even beyond the tax owed, such as the earned income tax credit
- Withholding and estimated payments
- Tax already paid during the year
A negative result is a refund. Partly refundable credits split between the second and third terms.
Taxable income, all in the 10% bracket$8,000
Income tax before credits$800
Tax withheld from pay$1,000
Refund with a $2,000 nonrefundable credit$1,000 (only $800 of the credit is used)
Refund with a $2,000 refundable credit$2,200
Refund with a $2,000 deduction instead$400 (tax falls to $600)
The same $2,000 is worth $800 as a nonrefundable credit, $2,000 as a refundable credit and $200 as a deduction at the 10% rate. That is why refundability decides how much a credit like the Child Tax Credit is worth to a low-income family.
At a glance
Major federal tax credits for individuals, 2026
| Credit | 2026 maximum | Refundable? | Who it is for |
|---|---|---|---|
| Child Tax Credit | $2,200 per child under 17 | Up to $1,700 per child | Parents; phases out above $200,000 MAGI ($400,000 joint) |
| Credit for other dependents | $500 per dependent | No | Dependents who don’t qualify for the Child Tax Credit |
| Earned income tax credit | $664 with no children to $8,231 with three or more | Yes | Low to moderate earned income |
| Child and dependent care credit | 20%–50% of up to $3,000 of care costs ($6,000 for two or more) | No | Care for a child under 13 or a disabled dependent so you can work |
| American Opportunity credit | $2,500 per student | 40%, up to $1,000 | First four years of college; phases out from $80,000 MAGI ($160,000 joint) |
| Lifetime Learning credit | $2,000 per return | No | College, graduate or job-skills courses |
| Saver’s Credit | $1,000 per person | No | Lower-income retirement savers |
| Adoption credit | $17,670 per child | Up to $5,120 | Qualified adoption expenses |
| Premium tax credit | Varies with premium and income | Yes, and payable in advance | Marketplace coverage, 100%–400% of the poverty line |
Put it in your plan
Tax Credits in MoneyWhatIf
MoneyWhatIf does not reproduce every credit on a return. Before Medicare, it estimates the premium tax credit from Marketplace premiums, household size and modeled income, then reconciles the advance credit against the year’s final modeled income. On the Taxes page, the tax map marks losing that credit as a cliff priced in dollars, and a state credit shows as a negative rung on the state bracket ladder. Other federal credits, such as the Child Tax Credit and the Saver’s Credit, are not priced, so modeled federal tax can run higher than a return that claims them.
Common questions
Tax Credits FAQs
Do I have to itemize to claim tax credits?
No. Credits are subtracted from tax after the deduction has been chosen, so they work the same whether you take the standard deduction or itemize. What the choice changes is taxable income, and so how much tax a nonrefundable credit has left to reduce. The Child Tax Credit, the education credits and the Saver’s Credit are all available to people who don’t itemize.
What happens to a nonrefundable credit I can’t use?
Usually it is lost. If the Saver’s Credit, the Lifetime Learning credit or the $500 credit for other dependents is more than your remaining tax, the extra simply disappears. A few credits carry forward instead: unused residential clean energy credit, for example, moves to the next year and can keep reducing tax there. Refundable credits avoid the problem, because any excess is paid to you.
Do retirees qualify for any tax credits?
Some. Early retirees buying Marketplace coverage before 65 may get the premium tax credit, investors with international funds in taxable accounts often claim the foreign tax credit, and low-income filers 65 or older may qualify for the credit for the elderly or the disabled on Schedule R. Most tax relief aimed at retirees, though, comes through deductions such as the senior deduction.
Why did my tax credit shrink when my income went up?
Most credits are income-tested. The Child Tax Credit loses $50 for each $1,000 of MAGI above its threshold, the American Opportunity credit phases out over a $10,000 band, or $20,000 joint, the Saver’s Credit drops in tiers, and the premium tax credit falls as income rises and stops above 400% of the poverty line. Each test uses its own version of income.
Are there state tax credits too?
Yes. States with an income tax set their own credits, which can include state versions of the earned income credit, credits for dependents or renters, and a credit for income tax paid to another state. They follow each state’s law, not the federal rules, so check your state revenue department before assuming a federal credit carries over.