Understanding Tax Credits: Major Credits for Individuals and Businesses

Welcome to another installment of our Taxes 101 series! Today we’re doing a deep dive into tax credits and how they can save you real money on your taxes.

If you’ve read our earlier post on tax deductions versus tax credits, you already know the fundamental difference: tax deductions reduce the amount of income subject to tax, while tax credits directly reduce the amount of tax you owe. Think of it this way: a deduction gives you a discount on your taxable income, but a credit is like having cash in hand to pay your tax bill.

That distinction matters because a $1,000 tax credit is always more valuable than a $1,000 tax deduction. The credit reduces your tax bill dollar-for-dollar, while the deduction’s value depends on your tax bracket. If you’re in the 22% tax bracket, a $1,000 deduction only saves you $220 in taxes—but a $1,000 credit saves you the full $1,000. It also means that it’s much easier to find a $1,000 tax deduction than a $1,000 tax credit - the rules around credits are particularly strict.

As long as you’re using good software or a good tax professional, and you provide the right information, most of the tax credits will get caught for you. However, there are some scenarios where specific documentation is required - so if you didn’t provide it, and nobody asked you about it, you won’t see the credit. My goal in this article is to make you aware of what’s available so you can ask the right questions or seek out the right sections in your software. We’re not going to cover every single tax credit available (there are dozens), but we’ll walk through the major credits that individuals and small business owners should know about.

Major Individual Tax Credits

Child Tax Credit & Additional Child Tax Credit

If you have kids, this is probably the most significant credit available to you. For 2025, the Child Tax Credit provides up to $2,200 per qualifying child under age 17 (recently increased from $2,000 due to recent legislation)

Who qualifies? Your child must be under 17 at the end of the tax year, be claimed as your dependent, be your son, daughter, stepchild, foster child, sibling, or descendant of any of these (like a grandchild), and have lived with you for more than half the year. They also need to have a Social Security Number valid for employment.

Income limitations: The credit begins to phase out at $200,000 of adjusted gross income for single filers and $400,000 for married couples filing jointly. For every $1,000 above these thresholds, your credit is reduced by $50.

The refundable portion: Here’s where it gets interesting. The Child Tax Credit is partially refundable, meaning even if you don’t owe any taxes, up to $1,700 per child of the credit is refundable - meaning it can create a refund even if you had zero tax liability.

Real-world impact: A married couple with two qualifying children and income under the phase-out threshold could receive $4,400 in tax credits. If their total tax liability was only $2,500, they’d get that wiped out, and depending on their earned income, they could receive additional refund from the refundable portion (up to $3,400 total for two children).

Earned Income Tax Credit (EITC)

The EITC is one of the most powerful credits available, yet it’s also one of the most frequently misused. It’s designed for working individuals and families with low to moderate income, and it’s fully refundable—meaning you can receive it even if you owe no taxes.

Who qualifies? You must have earned income from working (wages, self-employment, or farm income), meet certain income limits, and either have qualifying children or meet age requirements if you don’t have children. For 2025, the credit is available to single filers with no children earning up to about $19,100, and the income limits increase significantly if you have children (up to around $68,675 for married couples filing jointly with three or more children).

Credit amounts: The credit amount varies based on your income and family size. For 2025, childless workers might receive up to around $649, while a family with three or more children could receive over $8,000. The credit phases in as you earn income, reaches a maximum, then phases out as income increases.

Why it matters: The EITC is specifically designed to make work pay for lower-income families. Because it’s refundable, many eligible taxpayers receive the credit as part of their tax refund—money that can make a real difference in their financial lives.

Common mistake: Many people who qualify for the EITC don’t claim it because they assume they don’t need to file a tax return (their income is below the filing requirement). But if you qualify for the EITC, you should file even if you’re not required to—that’s the only way to claim the refund.

Do note that the Earned Income Credit typically comes with some additional documentation requirements for your tax preparer to make sure you aren’t gaming the system - so be prepared for a few extra questions.

Education Credits: American Opportunity vs. Lifetime Learning

If you or your dependents are pursuing higher education, tax credits can help offset the cost. There are two main education credits, and understanding which one to claim can save you thousands.

American Opportunity Tax Credit (AOTC):

Amount: Up to $2,500 per eligible student per year
Duration: Available for the first four years of post-secondary education
Requirements: Student must be pursuing a degree, enrolled at least half-time, and not have any felony drug convictions
Income limits: Phases out between $80,000-$90,000 for single filers, $160,000-$180,000 for joint filers (2025)
Refundable portion: 40% of the credit (up to $1,000) is refundable
Qualified expenses: Tuition, fees, and required course materials

Lifetime Learning Credit:

Amount: Up to $2,000 per tax return (not per student)
Duration: Available for any number of years
Requirements: Any post-secondary education or courses to acquire or improve job skills
Income limits: Phases out between $80,000-$90,000 for single filers, $160,000-$180,000 for joint filers (2025)
Refundable? No, this is a non-refundable credit
Qualified expenses: Tuition and fees only

Which should you choose? You can’t claim both credits for the same student in the same year, so here’s how to decide: If you’re in the first four years of college pursuing a degree, the AOTC is almost always better—it’s worth more ($2,500 vs. $2,000), it’s partially refundable, and it covers course materials. The Lifetime Learning Credit works well for graduate students, professionals taking continuing education courses, or anyone pursuing education beyond the four-year AOTC limit.

Pro tip: If you have multiple students in your family, you can claim the AOTC for one student and the Lifetime Learning Credit for another in the same year. And don’t forget to coordinate with the student loan interest deduction—you can claim both, but you can’t claim an education credit for expenses paid with tax-free educational assistance or scholarships.

Adoption Credit

Adoption can be expensive, and the Adoption Credit helps offset qualified adoption expenses. For 2025, the credit is worth up to $17,280 per child for qualified adoption expenses.

What’s covered? Reasonable and necessary adoption fees, court costs, attorney fees, traveling expenses (including meals and lodging while away from home), and other expenses directly related to the legal adoption of an eligible child.

Who qualifies? The child must be under 18 or physically or mentally incapable of caring for themselves. The credit is available for domestic and international adoptions, and there are special rules for adopting a child with special needs.

Special needs adoption: If you adopt a U.S. child with special needs and the adoption is finalized, you can claim the full credit amount even if you didn’t have $17,280 in expenses. This is a significant benefit that recognizes the challenges of special needs adoption.

Income limits: The credit begins to phase out at modified adjusted gross income of $259,190 and is completely phased out at $299,190 (2025 amounts).

Timing: You typically claim the credit in the year after you pay the expenses (or in the year the adoption is finalized for international adoptions). Starting in 2025, up to $5,000 per child of the adoption credit is refundable, with any remaining credit non-refundable but able to carry forward for up to five years.

Saver’s Credit (Retirement Savings Contributions Credit)

This is one of the most overlooked credits available, yet it can be worth up to $1,000 for individuals ($2,000 for married couples) just for contributing to your retirement savings.

Who qualifies? You must be at least 18, not a full-time student, not claimed as a dependent on someone else’s return, and have made contributions to a qualifying retirement plan (IRA, 401(k), 403(b), 457 plan, or ABLE account).

Income requirements: This credit is designed for low-to-moderate income taxpayers. For 2025, the income limits are $39,500 for single filers, $59,250 for heads of household, and $79,000 for married filing jointly. If you earn above these amounts, you don’t qualify.

Credit amount: The credit percentage depends on your income:

50% of contributions (up to $2,000 contributed) for lowest incomes
20% for moderate incomes
10% for incomes approaching the upper limit

Why it matters: This credit literally pays you to save for retirement. If you qualify and contribute $2,000 to your IRA, you could receive up to $1,000 back as a tax credit (50% rate), plus you get the deduction for the IRA contribution. That’s powerful double benefit.

Important note: The credit is non-refundable, meaning it can only reduce your tax liability to zero, not create a refund. But you can combine it with other credits and deductions for maximum benefit.

Major Business Tax Credits

If you’re a small business owner, several credits can help reduce your tax burden. These tend to be more complex than individual credits, but they’re worth understanding.

Small Business Health Care Tax Credit

If you’re a small employer providing health insurance to your employees, you might qualify for this credit to help offset the cost.

Who qualifies?

Fewer than 25 full-time equivalent employees
Average annual wages of less than $66,600 per employee (2025 amount, adjusted annually)
You pay at least 50% of employee premium costs
You offer coverage through the Small Business Health Options Program (SHOP) Marketplace

Credit amount: Up to 50% of premiums paid for small business employers (up to 35% for tax-exempt employers). The credit is largest for employers with fewer than 10 employees earning average wages below $33,300.

How long? You can claim the credit for two consecutive tax years.

Why it matters: Health insurance is expensive, and this credit can make offering employee health benefits more affordable for small businesses. It’s claimed on Form 8941 and can be a substantial tax benefit.

Research & Development (R&D) Credit

While complex, this credit deserves mention for businesses engaged in innovation and development activities. Recent tax law changes under OBBBA have made R&D expenses significantly more favorable for businesses.

What qualifies? Developing new or improved products, processes, software, techniques, formulas, or inventions. The activity must be technological in nature and intended to eliminate uncertainty about capability or methodology. Software development expenses specifically qualify for R&D treatment.

Who can claim? More businesses than you might think. Software development, engineering, manufacturing improvements, and product development can all potentially qualify. The R&D credit has become more accessible to small businesses and startups under recent tax law changes.

Major 2025 change: Starting in tax year 2025, domestic R&D expenses can now be fully deducted in the year incurred, reversing the five-year amortization requirement that was in place from 2022-2024. This is a significant improvement for businesses investing in innovation.

Why it’s complex: Determining qualified research expenses and calculating the credit requires careful documentation and often professional guidance. But for qualifying businesses, the combination of immediate expensing plus the R&D credit can provide substantial tax benefits.

Pro tip: Qualified small businesses (generally those with less than $5 million in gross receipts) can elect to use up to $500,000 of the R&D credit against payroll taxes instead of income taxes, which can be valuable for newer businesses that aren’t yet profitable. If you had R&D expenses from 2022-2024 that were being amortized, you can elect to apply the new immediate expensing rules retroactively and accelerate those deductions—consult a tax professional about your specific situation.

Energy and Home Improvement Credits: A Time-Sensitive Note

In previous years, several valuable credits were available for residential energy improvements, including the Residential Clean Energy Credit (for solar, geothermal, and other renewable energy systems) and the Energy Efficient Home Improvement Credit (for windows, insulation, HVAC systems, and other efficiency upgrades).

Important 2025 Update: These credits are expiring at the end of 2025 under the One Big Beautiful Bill Act (OBBBA). If you’re considering energy improvements to your home, you should act before the end of 2025 to potentially qualify for these credits.

For current details on these expiring credits, including qualification requirements and claim procedures, visit our Tax Credits Guide resource hub.

Because these credits are time-limited, we won’t detail them extensively here—this article is designed to provide evergreen information about tax credits that will remain available for the 2026 tax filing season and beyond. If you’re interested in energy credits, consult with a tax professional about their current status and your eligibility.

Understanding Refundable vs. Non-Refundable Credits

This distinction is crucial and often confusing, so let’s break it down clearly.

Non-Refundable Credits: A non-refundable credit can reduce your tax liability to zero, but it cannot create a refund or increase an existing refund. Think of it as a coupon that can reduce your bill but can’t result in the store paying you.

Example: Let’s say you owe $2,000 in taxes and have a $3,000 non-refundable credit. The credit will eliminate your $2,000 tax bill, but the remaining $1,000 of the credit disappears—you don’t get it back. However, some non-refundable credits can be carried forward to future years (like the Adoption Credit).

Refundable Credits: A refundable credit can reduce your tax below zero, creating or increasing a refund. Even if you owe no taxes at all, you can still receive the full value of a refundable credit.

Example: Using the same scenario, if you owe $2,000 in taxes and have a $3,000 refundable credit, the credit will eliminate your $2,000 tax bill AND you’ll receive a $1,000 refund.

Partially Refundable Credits: Some credits, like the Child Tax Credit and American Opportunity Tax Credit, are partially refundable. A portion can create a refund, while the rest is non-refundable.

Major Refundable Credits:

Earned Income Tax Credit (fully refundable)
Additional Child Tax Credit (refundable portion of Child Tax Credit—up to $1,700 per child for 2025)
American Opportunity Tax Credit (40% refundable, up to $1,000)
Adoption Credit (partially refundable—up to $5,000 per child starting in 2025, can carry forward unused amounts)
Premium Tax Credit for health insurance (refundable)

Most Non-Refundable Credits:

Lifetime Learning Credit
Saver’s Credit
Child and Dependent Care Credit
Most business credits

Why it matters for planning: If you have both refundable and non-refundable credits, the non-refundable credits are typically applied first to reduce your tax liability, then refundable credits are applied, potentially creating a refund. Understanding this can help you plan strategically—for example, timing certain expenses or income to maximize the value of non-refundable credits that might otherwise be wasted.

How to Actually Claim Tax Credits

Knowing about credits is one thing; claiming them correctly is another. Here’s what you need to know.

Documentation is critical: Most credits require specific documentation. For education credits, you’ll receive Form 1098-T from your school. For childcare expenses, you’ll need the provider’s name, address, and tax ID. For business credits, you’ll need detailed records of wages, expenses, or other qualifying amounts.

Use the right forms:

Child Tax Credit: Claimed on Schedule 8812
Earned Income Tax Credit: Claimed directly on Form 1040, requires completion of Schedule EIC if claiming with children
Education Credits: Form 8863
Adoption Credit: Form 8839
Business credits: Various forms depending on the credit (Form 3800 for general business credits, Form 8941 for health care credit, etc.)

Tax software vs. professional help: Tax software has gotten very good at identifying potential credits through question-and-answer sequences. For straightforward credits (Child Tax Credit, education credits), software often works well. For complex credits (business credits, adoption credit, or situations with multiple overlapping credits), professional guidance can ensure you’re maximizing benefits and documenting everything correctly.

Don’t leave money on the table: The IRS won’t track you down to give you credits you qualified for but didn’t claim. It’s your responsibility to identify and claim eligible credits. If you discover you missed a credit in a prior year, you can file an amended return (Form 1040-X) within three years of the original filing date to claim it.

Common Mistakes to Avoid

Not claiming credits you qualify for: The biggest mistake is simply not knowing about credits or assuming you don’t qualify. Many taxpayers leave thousands of dollars on the table each year because they don’t claim the EITC, education credits, or other benefits they’re entitled to.

Double-dipping: You can’t claim multiple tax benefits for the same expense. For example, you can’t claim the American Opportunity Tax Credit for tuition you paid with tax-free scholarship money or employer educational assistance. You also can’t claim both education credits for the same student in the same year.

Missing documentation: Credits often require specific forms or documentation. Missing a Form 1098-T or failing to get a provider’s tax ID for childcare can cost you valuable credits.

Incorrectly calculating income for phase-outs: Many credits phase out based on Modified Adjusted Gross Income (MAGI), which may include items not in your regular AGI. Using the wrong income amount can lead to claiming too much or too little of a credit.

Forgetting about carryforwards: Some credits, like the Adoption Credit, can be carried forward if you can’t use the full amount in one year. Failing to track and claim these carryforwards means leaving money unclaimed.

Not coordinating with other tax benefits: Tax planning works best when you consider the whole picture. For example, making a large retirement contribution might drop your income below an education credit phase-out threshold, allowing you to claim more credit. Retirement contributions might also help you qualify for or increase your Saver’s Credit.

When to Get Professional Help

While many credits are straightforward enough for DIY tax filing with good software, certain situations call for professional guidance:

Complex family situations: Divorced parents sharing custody, supporting elderly parents, multiple dependents with various credits available—these situations benefit from professional review to ensure you’re maximizing benefits legally.

Business credits: R&D credits and other business credits often require detailed documentation, careful calculation, and strategic planning. The cost of professional help is often far outweighed by the value of credits properly claimed.

Multiple overlapping credits: When you potentially qualify for several credits that might interact (education credits + EITC + child credits, for example), professional guidance ensures optimal claiming strategy.

First-time credit claiming: If it’s your first time claiming a complex credit (adoption credit, significant education credits, business credits), professional review can ensure everything is done correctly and can serve as a template for future years.

Audit concerns: Credits, especially EITC and education credits, are areas of IRS focus. If you’re concerned about audit risk or have a complex situation, professional preparation provides both accuracy and representation if questions arise.

Maximizing multi-year strategies: Some tax planning strategies involve timing income, deductions, and credits across multiple years. Professional guidance can help identify opportunities you might miss on your own.

The Bottom Line on Tax Credits

Tax credits represent some of the most valuable tax benefits available to individuals and businesses. Unlike deductions that reduce taxable income, credits directly reduce taxes owed—and refundable credits can even create refunds when you owe no taxes at all.

The major credits we’ve covered—Child Tax Credit, EITC, education credits, adoption credit, and Saver’s Credit for individuals, plus business credits like the R&D credit and health care credit—can be worth thousands or even tens of thousands of dollars. But these benefits only help you if you know about them and claim them correctly.

Understanding which credits you qualify for, maintaining proper documentation, and filing accurately ensures you’re not leaving money on the table. Whether you use tax software or work with a tax professional, make sure you’re actively looking for credits you’re entitled to claim.

Tax credits aren’t just technical details on a tax form—they’re policy tools designed to support families, encourage education, reward work, facilitate adoption, promote retirement saving, and support small businesses. Taking advantage of the credits you qualify for isn’t gaming the system; it’s using the tax code exactly as intended.

Dive Deeper: Tax Credits Resource Hub

For more detailed information on specific tax credits including comprehensive guides on energy credits, education credits, healthcare credits, and business credits, visit our Tax Credits Guide resource hub. You’ll find downloadable resources covering qualification requirements, income limitations, claiming procedures, and planning strategies for each major credit.

The resource hub includes detailed guides on:

Energy & Vehicle Tax Credits
Education Tax Credits & Deductions
Premium Tax Credit & Healthcare Subsidies
Small Business Health Care Credit
Family Tax Credits

These resources provide the detailed, year-specific information you need to understand and claim credits effectively.

Get Expert Help Maximizing Your Credits

Questions about which credits you qualify for? Wondering if you’re missing valuable tax benefits? At JCT Tax Solutions, we specialize in identifying all the credits and deductions you’re entitled to claim.

Our comprehensive tax preparation services go beyond just filling out forms—we actively look for opportunities to reduce your tax burden through available credits. Whether you’re a family trying to maximize child and education credits, a small business owner exploring business credits, or anyone with a complex tax situation, we’re here to help.

However, the best time to plan for the credits you will receive is before you file your return. We can’t change history when filing, but during a Tax Planning session, we can put together a plan to get you the best value for your tax dollars.

Ready to make sure you’re claiming every credit you deserve? Contact us today to schedule a consultation. Let’s work together to ensure you’re taking full advantage of the tax benefits available to you.

This article is part of our Taxes 101 series designed to help individuals and small business owners understand essential tax concepts. The information provided is general in nature and hasn’t been customized for your specific tax situation. Tax laws are complex and subject to change. For personalized advice regarding your eligibility for tax credits and overall tax planning needs, please schedule a consultation with our professional team.