Tax credits 2023-2024

What are tax credits?

The IRS defines tax credits as "a dollar-for-dollar amount taxpayers claim on their tax return to reduce the income tax they owe." This means a tax credit of $4,000 is worth $4,000 in your pocket over the course of a year or when you file your taxes and have to pay any amounts owed.

Tax credits are available on both the federal and state levels and may apply in certain family and income situations or to incentivize certain behaviors. For example, there are tax credits for people with a certain number of children or dependents, those who save a certain amount of money or even for those making certain "green" purchases that can improve energy efficiency.

That said, don't confuse tax credits with tax deductions, since they work differently. The IRS defines a tax deduction as "an amount you subtract from your income when you file so you don’t pay tax on it."

According to certified public accountant Lisa Greene-Lewis of TurboTax, if you are faced with a choice between the two, you always want to pick a tax credit over a deduction. "Unlike a deduction, a $100 credit reduces your tax dollar-for-dollar ($100)," she said. "On the other hand, a deduction reduces your taxable income by $100."

Types of tax credits

When it comes to tax credits specifically, you should also know that some can be more lucrative than others depending on your situation. That's because some tax credits are nonrefundable, whereas others are refundable or partially refundable.

• Nonrefundable: A nonrefundable tax credit is one you can receive only if you owe taxes for the year. If your tax liability is zero, nonrefundable tax credits won't do anything to help you out.
• Refundable: A refundable tax credit is one you can use even if your tax liability is zero or less than the credit amount. This means getting money back when you file, even if you owe no taxes or very little for the tax year.
• Partially refundable: Some tax credits fall somewhere in the middle as partially refundable, meaning you can get some money from them if you have a low or no tax liability but not the full amount.

Tax credits for the 2023 tax year

Below you'll find an overview of some of the most common and popular tax credits for the 2023 tax year. If you are eligible, these credits can be applied when you file your taxes in 2024.

Earned Income Tax Credit (EITC)

The Earned Income Tax Credit (EITC) is a refundable tax credit that's available for low- and moderate-income households. The IRS estimates that approximately 80% of workers claim this credit.

How much the EITC is worth depends on income and family size. The IRS lists the following ranges for this credit based on this factor:

• $11 to $7,430 with three or more qualifying children.
• $10 to $6,604 with two qualifying children.
• $9 to $3,995 with one qualifying child.
• $4 to $600 with no qualifying children.

For the 2023 tax year, it may be possible to qualify for the EITC if your earnings were below the following thresholds:

• $56,838 ($63,398 married filing jointly) with three or more qualifying children who have valid Social Security numbers (SSNs).
• $52,918 ($59,478 married filing jointly) with two qualifying children who have valid SSNs.
• $46,560 ($53,120 married filing jointly) with one qualifying child who has a valid SSN.
• $17,640 ($24,210 married filing jointly) with no qualifying children.

Also be aware that you cannot have more than $11,000 in investment income for the year and still qualify for the EITC.

Child tax credit 

You can also get a tax credit based on children in your care in 2023. The child tax credit is worth up to $2,000 per child, and up to $1,600 per child may be refundable through the additional child tax credit if you meet certain requirements.

According to the IRS, the full credit is available for each qualifying child if you meet all eligibility factors and you earn no more than:

• $200,000 if filing single.
• $400,000 if filing a joint return.

Parents and guardians with incomes that exceed these thresholds may be eligible to claim a partial credit.

Child and dependent care tax credit

The child and dependent care credit is a separate tax credit that can cover up to 35% of up to $3,000 in child care and similar costs. This credit can apply for a child who is under the age of 13 or for a spouse or a parent who cannot care for themselves.

You (and your spouse if filing a joint return) must have earned income during the year to claim the credit. The credit gets smaller at higher incomes. The maximum this credit can be worth is $3,000 for one person or $6,000 for two or more people for the 2023 tax year.

American Opportunity Tax Credit (AOTC)

The American Opportunity Tax Credit (AOTC) is for students who are pursuing a degree or other recognized education credential and enrolled in school at least half-time for at least one academic period during a tax year. Other requirements include not having finished the first four years of higher education at the beginning of the tax year and not having claimed the AOTC or the former Hope credit for more than four tax years. You also cannot have a felony drug conviction at the end of the tax year to qualify.

This credit is worth up to $2,500 per eligible student and can be used for qualified higher education expenses during the first four years of college or trade school. If the credit results in you owing $0 on your federal taxes, up to 40% of the remaining credit amount up to $1,000 can be refunded to you.

Lifetime Learning Credit (LLC)

The Lifetime Learning Credit (LLC) is worth up to $2,000 per tax return and applies to "qualified tuition and related expenses paid for eligible students enrolled in an eligible educational institution," per the IRS.

This credit can apply when a student is pursuing an undergraduate, graduate or professional degree, and there are no limits to how many years the credit can be applied.

Retirement Savings Contributions Credit (Saver’s Credit)

The Retirement Savings Contributions Credit (Saver’s Credit) is geared to low-income workers who save for retirement in an eligible account like a traditional or Roth IRA, a 401(k), a 403(b), a governmental 457(b), SARSEP or SIMPLE plan. Other eligible accounts exist, and contributions made to an ABLE account for which you are the designated beneficiary can also qualify.

You also must be:

• At least 18 years old.
• Not a student.
• Not claimed as a dependent on another person's return.

The amount of this credit varies based on your adjusted gross income (AGI) and can be 50%, 20% or 10% of eligible contributions to qualifying retirement accounts. The maximum contribution amount that may qualify for the credit is $2,000 (or $4,000 if married filing jointly). This means the maximum credit that can apply on your tax return is $1,000 if single or $2,000 if married filing jointly.

Health insurance premium tax credits

If you purchase health insurance through the federal health insurance marketplace or your state marketplace, you may also qualify for premium tax credits that lower your insurance costs. These credits are based on household income and family size and are available to those who earn between 100% and 400% of the Federal Poverty Limit (FPL). Premium tax credits are also fully refundable.

Households who earned more than 400% of FPL in 2023 may also qualify for a premium tax credit, but only after they spend up to 8.5% of their income (prorated monthly) on eligible health care expenses.

Clean vehicle tax credits

For the 2023 tax year, individuals who purchase a new electric vehicle can qualify for up to $7,500 in tax credits. Eligible vehicles must meet specific criteria and qualify as a plug-in EV or fuel cell electric vehicle (FCV). Income caps also limit who can qualify for this credit, so your modified adjusted gross income (MAGI) cannot be more than:

• $300,000 for married couples filing jointly.
• $225,000 for heads of households.
• $150,000 for all other filers.

The same type of credit can apply for the purchase of a used electric vehicle, but only up to a maximum of $4,000. Income limits are also lower for this credit, thus fewer people qualify. To  qualify for this credit for the 2023 tax year, your modified adjusted gross income (MAGI) cannot be more than:

• $150,000 for married filing jointly or a surviving spouse.
• $112,500 for heads of households.
• $75,000 for all other filers.

Home energy tax credits

You can also apply certain tax credits if you make certain energy-efficient upgrades to your home that meet the requirements detailed on energy.gov. These can include upgrades like:

• Exterior doors and windows.
• Skylights and insulation materials.
• Central air conditioners, water heaters, furnaces, boilers and heat pumps.
• Biomass stoves and boilers.
• Home energy audits.

These credits can be worth up to 30% of a maximum of $1,200 in 2023, although heat pumps, biomass stoves and boilers have a separate annual credit limit of $2,000. This means these specific home energy tax credits can be worth up to a total of $3,200 in 2024 for the 2023 tax year.

A separate residential clean energy credit can also apply for upgrades that meet requirements detailed on energy.gov, such as:

• Solar, wind and geothermal power generation.
• Solar water heaters.
• Fuel cells.
• Battery storage (beginning in 2023).

This credit can be worth up to 30% of the cost of these upgrades in 2023.

Bottom line

Tax credits can reduce how much tax you owe, so learning about all the credits you may be eligible for is a good use of your time. This is true whether you want to reduce the taxes you have to pay or you just want to boost your refund. Knowing about available tax credits can also be helpful if you know you'll be in need of tax relief when you file this year.

This list is just an overview of the most popular and common tax credits out there, but all kinds of additional credits and deductions exist. Fortunately, the best tax software companies will check for all credits and deductions that might apply to your return. A qualified tax professional can also help you get all the tax breaks you are eligible for.