When it comes to lowering your tax bill, every dollar matters. One of the most powerful tools available to taxpayers is the tax credit—and understanding how these credits work can put real money back in your pocket. If you’ve heard more about tax deductions than tax credits, you might wonder what sets them apart. Here’s a simple breakdown to help you make the most of every opportunity this tax season.
Tax Credits vs. Tax Deductions: What’s the Difference?
Although both can reduce your tax bill, they work in different ways:
- Tax deductions lower your taxable income.
- Tax credits lower your actual tax liability dollar for dollar, often making them even more valuable.
Some credits can even create or increase your refund—meaning more money back for you.
Types of Tax Credits
Tax credits fall into two main categories: nonrefundable and refundable. Knowing the difference can help you understand how each one impacts your final refund.
Nonrefundable Tax Credits
A nonrefundable credit can reduce the taxes you owe down to zero, but it can’t give you money beyond that point. For example, if you owe $300 in taxes and have a $500 nonrefundable credit, only $300 of that credit can be used.
Common nonrefundable credits include:
- Foreign Tax Credit: For taxes paid on investment income from overseas sources.
- Child and Dependent Care Credit: For expenses paid to care for a child or qualifying dependent while you work or job hunt.
- Education Credits: For qualifying college or higher-education costs paid for yourself or your dependents.
- Retirement Savings (Saver’s) Credit: For eligible contributions to your IRA or employer retirement plan. Depending on your income, filing status, and AGI, you may qualify for up to $1,000 (or $2,000 if married filing jointly).
Refundable Tax Credits
Refundable credits are even more valuable. If the credit exceeds the amount of tax you owe, the IRS will refund the difference. Some refundable credits are fully refundable, while others only refund a portion.
Examples include:
- Earned Income Tax Credit (EITC): Designed to help lower-income workers, with the amount based on income and number of qualifying children.
- Child Tax Credit: For the 2025 tax year, the credit is worth up to $2,200 per child under age 17, and up to $1,700 of that amount may be refundable depending on your income.
- American Opportunity Tax Credit (AOTC): Offers up to $2,500 per eligible student for the first four years of higher education. Up to 40% of the remaining credit—up to $1,000—may be refunded even if you owe no tax.
- Premium Tax Credit (PTC): Helps qualifying individuals and families afford health insurance through the Marketplace. The amount is based on income, family size, and tax bracket.
Maximize Your Refund With Tax Credits
Tax credits are one of the most effective ways to reduce your tax bill or increase your refund. Whether you’re paying for childcare, saving for retirement, covering college costs, or purchasing health insurance, credits can make a meaningful difference.
At ExpressTaxRefund.com, we help you identify every credit you qualify for—so you can keep more of your hard-earned money and file with confidence.
