Tax credits are more favorable than deductions because a tax credit reduces the amount of income tax you may have to pay. Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself.
The following are the main tax credits available for individuals in 2025:
Residential Clean Energy Credit
The residential clean energy credit is one of the casualties of the 2025 Tax Act’s broad repeal of clean energy credits. Its expiration date has been moved from December 31, 2032 to December 31, 2025. The amount of the credit equals 30 percent of the cost (with no cap) of qualified residential energy property, such as solar energy systems, solar water heaters, and battery storage. While you can still take advantage of the credit, be aware that the IRS requires that qualified property must be paid for and installed by December 31. So make sure that your contractor can commit to completing the project by that deadline and that you can get out of the deal if they don’t follow through.
Energy Efficient Home Improvement Credit
Another credit expiring on December 31, 2025 is the energy efficient home improvement credit. This credit equals 30 percent of the cost of installing energy efficient doors, windows, central air conditioners, electric panels, water heaters, and several other qualifying improvements. The credit has a dollar limit for each type of improvement, and an overall annual limit of $1,200. Heat pumps, heat pump water heaters, biomass stoves, and boilers have a separate $2,000 annual limit, bringing the total potential value of the credit to $3,200.
Child Tax Credit
For 2025, you can claim a tax credit of $2,200 (up to $1,700 is refundable) for each dependent child under age 17, and a $500 credit for qualifying dependents other than qualifying children. The credit is phased out for AGI over $200,000 ($400,000 for married filing jointly). For 2025, new requirements for providing Social Security numbers apply.
Earned Income Credit
The earned income tax credit (EITC) is a generous credit based on a percentage of earned income that phases out at relatively low levels of income. For 2025, the credit completely phases out at AGI of $68,675 for individuals with three qualifying children and at lower levels for individuals with fewer children (or none). The credit is unavailable to individuals with more than $11,950 in investment income.
Dependent Care Credit
If you incurred eligible expenses to care for a dependent under age 13 so that you can work or look for work, you can claim the child and dependent care credit. The credit is based on a percentage of eligible expenses. For 2025, the percentage ranges from 20 to 35% based on AGI. Up to $3,000 in childcare expenses can be taken into account for one qualifying dependent (up to $6,000 for two or more qualifying dependents). Although the credit percentage phases down to 20% at relatively low levels of income, it does not go any lower, even for very high incomes.
Premium Tax Credit
A health insurance subsidy is available in the form of a premium assistance tax credit for eligible individuals and families who purchase health insurance through the Affordable Care Act’s Health Insurance Marketplace (aka, the “Exchange”). This credit is refundable and payable in advance directly to the insurer on the Exchange. Beginning in 2026, individuals with incomes exceeding 400 percent of the poverty level will not be eligible for the credit. (There was no such limit from 2021-2025.)
American Opportunity Tax Credit
If you have one or more postsecondary students in the family, you may qualify for an American opportunity tax credit of up to $2,500 per year for each eligible student. The credit, which is available for the first four years of a student’s postsecondary education, is based on 100 percent of the first $2,000 of qualified education expenses, and 25 percent of the next $2,000 of such expenses paid. The credit is phased out for AGI above $80,000 ($160,000 for joint filers).
Lifetime Learning Credit
The lifetime learning credit applies to tuition and fees paid for the enrollment or attendance of yourself, your spouse, or your dependents for courses of instruction at an eligible educational institution. The credit, which is limited to $2,000 per tax return, per year, is based on 20 percent of the first $10,000 in qualifying expenses. The credit is phased out for AGI above $80,000 ($160,000 for joint filers). The lifetime learning credit and the American opportunity tax credit cannot be claimed for the same student in the same year.
Savers Credit
For 2025, a retirement savings credit of up to $1,000 ($2,000 for joint filers) is available for qualified contributions made to a traditional IRA, a Roth IRA, and several other types of retirement plans. The credit is calculated by multiplying up to $2,000 of an individual’s qualified contributions by a percentage of either 50, 20, or 10 percent, determined using the individual’s AGI and filing status. For 2025, the highest income that qualifies for the 10 percent credit is $79,000.
Section 529 Plans Enhancements
The OBBBA brought plenty of good news for 529 plan owners. You can now withdraw funds for a wide range of K-12 expenses (as opposed to tuition only under the old rules). Eligible expenses include amounts paid for curricular materials, books, or other instructional materials, online educational materials, tutoring or educational classes outside the home, testing fees, fees for dual enrollment in an institution of higher education, and educational therapies for students with disabilities. Beginning in 2026, the limit of withdrawals for K-12 expenses doubles, from $10,000 to $20,000.
Section 529 plan funds can also now be used for post-secondary credentialing expenses, a broad new category that includes vocational training and licensing programs, continuing education (where required to maintain a credential), fees for licensing and certification exams, and many other post-secondary educational expenses that fall outside the realm of traditional higher education. There is no annual limit on withdrawals used to pay for such expenses.