Federal tax credits remain a powerful way to lower your tax bill for the 2026 tax year (returns filed in 2027 for income earned in 2026). These credits directly reduce the amount you owe the IRS dollar-for-dollar, often providing more savings than deductions, which only reduce taxable income.
Tax credits come in three main types: refundable, nonrefundable, and partially refundable. Understanding the differences—and which major credits are available or have changed—can help maximize your refund or minimize what you owe.
What Is a Tax Credit?
A tax credit subtracts a set amount directly from your tax liability. For example, a $1,000 credit reduces your tax bill by $1,000. If the credit exceeds what you owe, the outcome depends on whether it’s refundable.
Unlike deductions (which lower taxable income and save you money based on your tax bracket), credits offer a direct, often more valuable reduction, as noted by sources like Investopedia.
Common tax credits cover expenses like health insurance, higher education, and childcare. However, some popular ones have expired: Federal tax credits for electric vehicle (EV) purchases and energy-efficient home upgrades are no longer available in 2026, as their eligibility ended in late 2025 due to recent legislative changes.
How Refundable Tax Credits Work
Refundable credits can reduce your tax bill below zero, resulting in a refund from the IRS for the excess amount. Even if you owe little or no tax—or aren’t normally required to file—you may still claim them by filing a return.
Key examples include:
- Premium Tax Credit — Helps cover health insurance premiums bought through the marketplace (HealthCare.gov).
- Earned Income Tax Credit (EITC) — A major benefit for low- to moderate-income workers, with amounts based on income, filing status, and number of qualifying children.
For 2026, the IRS has increased the maximum EITC amounts (inflation-adjusted):
- Up to $664 for workers with no qualifying children.
- Up to $4,427 for those with one qualifying child.
- Up to $7,316 for those with two qualifying children.
- Up to $8,231 for those with three or more qualifying children.
Eligibility depends on earned income and adjusted gross income (AGI) limits, which also adjust annually. The full credit is refundable, making it especially helpful for eligible families.
How Nonrefundable Tax Credits Work
Nonrefundable credits reduce your tax liability only down to zero—no refund for any leftover amount. Unused portions may expire or, in some cases (like the Adoption Credit), carry forward to future years.
These can be less beneficial for low-income taxpayers who owe little tax, as they may not use the full credit. Examples include certain education or adoption-related credits (beyond partial refundability).
How Partially Refundable Credits Work
These combine both types: Part reduces your tax bill to zero (nonrefundable portion), and the remainder may be refundable up to a limit.
A prime example is the American Opportunity Tax Credit (AOTC) for postsecondary education:
- Up to $2,500 per eligible student (100% of the first $2,000 in qualified expenses + 25% of the next $2,000).
- If it reduces your liability to zero, up to 40% of the remaining amount (max $1,000) can be refunded.
This makes it valuable for students in the first four years of higher education, covering tuition, fees, books, and supplies.
Summary
Review your eligibility using IRS tools like the EITC Assistant or Interactive Tax Assistant on IRS.gov. With recent changes (including from the One Big Beautiful Bill), some provisions have shifted—energy and EV credits are gone, but family-focused ones like the EITC have seen boosts.
Consult a tax professional or use reliable software to ensure you claim everything available. Filing accurately and early can speed up refunds, especially for refundable credits. These incentives can significantly ease financial burdens—don’t miss out!
Owning real estate can not only be a great investment strategy, but it can also help lower your overall tax burden! Are you thinking of buying or selling real estate in the South Florida area? We can help! Contact Natasha at Live South Florida Realty, Inc. today! Also, be sure to download the free Florida Home Search App for your smartphone or tablet.
