Federal Tax Credits: Maximize Your Savings

Federal tax credits are a form of tax relief provided by the government, allowing individuals and businesses to reduce their tax liability. Unlike deductions, which lower the amount of income subject to tax, credits directly decrease the amount of tax owed. This makes them a powerful tool for taxpayers looking to maximize their savings.

There are various types of federal tax credits, each designed to incentivize specific behaviors or support particular groups of taxpayers. Here are the main categories:

• Nonrefundable Credits: These credits can reduce your tax bill to zero but will not result in a refund if the credit exceeds your tax liability.

• Refundable Credits: These credits can reduce your tax bill to below zero, resulting in a refund. This means you can receive money back even if you do not owe taxes.

• Partially Refundable Credits: These credits allow you to receive a portion of the credit as a refund while the remaining amount is nonrefundable.

The EITC continues to support low- to moderate-income workers and families by reducing their tax liability and potentially increasing their refund. For tax year 2025, the maximum credit amounts are:

• $8,046 for taxpayers with three or more qualifying children
• $7,152 with two qualifying children
• $4,328 with one qualifying child
• $649 with no qualifying children

Eligibility is based on income, filing status and number of qualifying children. Taxpayers can consult the IRS EITC tables or use the EITC Qualification Assistant to determine their eligibility.

For the 2025 tax year, the Child Tax Credit remains at $2,000 per qualifying child under age 17. The refundable portion, known as the Additional Child Tax Credit (ACTC), is capped at $1,700 per child. Eligibility phases out for single filers with incomes over $200,000 and married couples filing jointly over $400,000.

Note: Legislative proposals have been introduced to increase the CTC to $2,500, but as of now, the credit remains at $2,000.

The AOTC assists students and families with education expenses. For 2025, the credit offers up to $2,500 per eligible student, calculated as:

• 100% of the first $2,000 of qualified education expenses
• 25% of the next $2,000 of expenses

Up to $1,000 of the credit is refundable, meaning it can increase your refund even if you owe no tax. Eligibility is subject to income limits: the credit phases out for modified adjusted gross incomes between $80,000 and $90,000 for single filers and $160,000 and $180,000 for joint filers.

Homeowners making qualified energy-efficient improvements can claim a credit equal to 30% of the costs, with annual limits:

• Up to $1,200 for general improvements (e.g., insulation, windows, doors)
• An additional $2,000 for specific items like electric or natural gas heat pumps, water heaters and biomass stoves

These credits apply to improvements made through 2032.

This credit equals 30% of the costs for installing qualified clean energy systems, such as:

• Solar electric and water heating systems
• Wind turbines
• Geothermal heat pumps
• Fuel cells
• Battery storage technology (starting in 2023)

The credit is available for systems installed through 2032, with a phase-down beginning in 2033.

The landscape of federal tax credits is constantly evolving. Here are some current trends to be aware of:

• Increased Focus on Sustainability: More credits are being introduced to promote renewable energy and energy efficiency. This aligns with global efforts to combat climate change and reduce carbon footprints.

• Expansion of Child and Dependent Care Credits: Recent legislation has expanded the Child and Dependent Care Credit, making it easier for families to claim assistance for childcare costs.

• Digitalization of Tax Filing: With the rise of online tax preparation services, many credits can now be claimed more easily and efficiently, leading to higher participation rates among eligible taxpayers.

To make the most of federal tax credits, consider the following strategies:

• Stay Informed: Keep up with changes to tax laws and credits that may affect your eligibility and potential savings.

• Consult a Tax Professional: Working with a tax advisor can help you identify credits you may qualify for and ensure you maximize your refund.

• Plan Ahead: If you anticipate a significant life change, such as having a child or purchasing a home, consider how these events may impact your tax situation and available credits.

• Utilize Tax Software: Many tax preparation software programs can help identify credits you may qualify for and guide you through the claiming process.

Federal tax credits can provide substantial savings and financial relief for individuals and families alike. By understanding the different types of credits available, staying informed about new trends and employing effective strategies, taxpayers can significantly reduce their tax liabilities. Whether you are a first-time filer or have years of experience, taking advantage of federal tax credits is a smart financial move.