758 / What credits may be taken against the tax?
Editor's Note: Many of the credits listed below contain sunset provisions so that they apply only so long as Congress chooses to renew them from year to year. Congress historically acts late in the year to extend many credits and extender provisions (see below for more details).
As of the date of this revision and with respect to provisions that are not permanent, Congress has not indicated whether it will extend various tax credits for future years.1 Applicable extension periods are noted in the discussion below.
After rates have been applied to compute the tax, certain payments and credits may be subtracted from the tax to arrive at the amount of tax payable. Refundable credits are recoverable regardless of the amount of the taxpayer's tax liability for the taxable year. The refundable credits include:
- Taxes withheld from salaries and wages.2
- Overpayments of tax.3
- The excess of Social Security withheld (two or more employers).4
- The earned income credit.5
Planning Point: For 2020 and 2021 only, IRS guidance allowed taxpayers who are eligible for the credit to calculate the earned income tax credit using 2019 earned income if it was higher than 2021 earned income, even if they did not have any earned income in 2021. Taxpayers who did not file a return or claim the earned income tax credit for 2020 or 2021 can file an amended return to take advantage of the relief. However, the IRS was clear to note that these taxpayers cannot use their 2020 income to calculate their 2021 earned income tax credit.6
- A portion of the child tax credit ($1,700 in 2026, see Q 760).
- A portion of the American Opportunity credit.
- The 72.5 percent health care tax credit for uninsured workers displaced by trade competition.7
- A portion of the adoption tax credit ($5,120 in 2026)
- The unused long-term minimum tax credit.
The nonrefundable credits are as follows:
- The personal credits—which consist of the child and dependent care credit;8 the credit for the elderly and the permanently and totally disabled;9 the non refundable portion of the qualified adoption credit;10 the nonrefundable portion of the child tax credit (see Q 760);11 the American Opportunity, Hope Scholarship, and Lifetime Learning credits12 (see Q 761); the credit for elective deferrals and IRA contributions (the "saver's credit," which became permanent under PPA 2006);13
- The Energy Efficient Home Improvement Credit, previously called the "nonbusiness energy property credit" (extended through 2025 only, pursuant to the 2025 OBBB general repeal of green energy credits);14 and the Residential Clean Energy Credit, previously called the residential energy efficient property credit (extended through 2025).15
- Other nonbusiness credits.16
- The general business credit (see Q 7884) is the sum of the following credits determined for the taxable year: (1) the investment credit determined under IRC Section 46 (see Q 7893) (including the rehabilitation credit; see Q 7808); (2) the work opportunity credit determined under IRC Section 51(a) extended through 2025); (3) the alcohol fuels credit determined under IRC Section 40(a); (4) the research credit (made permanent by PATH) determined under IRC Section 41(a); (5) the low-income housing credit (see Q 7801) determined under IRC Section 42(a); (6) the enhanced oil recovery credit (see Q 7884) under IRC Section 43(a); (7) in the case of an eligible small business, the disabled access credit determined under IRC Section 44(a); (8) the renewable electricity production credit under IRC Section 45(a) (extended only through 2009 under EIEA 2008); (9) the empowerment zone employment credit determined under IRC Section 1396(a) (extended through 2025); (10) the Indian employment credit as determined under IRC Section 45A(a) (extended through 2021); (11) the employer Social Security credit determined under IRC Section 45B(a); (12) the orphan drug credit determined under IRC Section 45C(a) (as modified by the 2017 tax reforms); (13) the new markets tax credit determined under IRC Section 45D(a) (made permanent by the 2025 OBBB); (14) in the case of an eligible employer (as defined in IRC Section 45E(c)); the small employer pension plan startup cost credit determined under IRC Section 45E(a); (15) the employer-provided child care credit determined under IRC Section 45F(a); (16) the railroad track maintenance credit determined under IRC Section 45G(a) (made permanent by the 2021 CAA, although the credit was reduced from 50 percent to 40 percent); (17) the biodiesel fuels credit determined under IRC Section 40A(a) (extended through 2024); (18) the low sulfur diesel fuel production credit determined under IRC Section 45H(a); (19) the marginal oil and gas well production credit determined under IRC Section 45I(a); (20) for tax years beginning after September 20, 2005, the distilled spirits credit determined under IRC Section 5011(a); (21) for tax year beginning after August 8, 2005, the advanced nuclear power facility production credit determined under IRC Section 45J(a); (22) for property placed in service after December 31, 2005, the nonconventional source production credit determined under IRC Section 45K(a); (23) the energy efficient home credit determined under IRC Section 45L(a) (extended through 2025); (24) the energy efficient appliance credit determined under IRC Section 45M(a) (extended through 2014); (25) the portion of the alternative motor vehicle credit to which IRC Section 30B(g)(1) applies; and (26) the portion of the alternative fuel vehicle refueling property credit to which IRC Section 30C(d)(1) applies (extended through 2025).17
Under the Inflation Reduction Act, if applicable wage and apprenticeship requirements were met, the maximum credit was 30% for depreciable alternative fuel vehicle refueling property. Otherwise, it was limited to 6% in cases involving depreciable alternative fuel vehicle refueling property (and the credit for depreciable alternative fuel vehicle refueling property cannot exceed $100,000). For all other qualifying property, the limit was $1,000. (These credit limitations applied on a per-item basis, rather than a cumulative basis).18 While the provisions were set to apply through 2032, the 2025 OBBB repealed the 30C tax credit for tax years beginning after 2025.
ETIA 2005 provides an alternative motor vehicle credit for qualified fuel cell vehicles, advanced lean-burn technology vehicles, qualified hybrid vehicles, and qualified alternative fuel vehicles.19 (This credit replaced the prior deduction for qualified clean-fuel vehicle property, which expired on December 31, 2005.)20 The portion of the credit attributable to vehicles of a character subject to an allowance for depreciation is treated as a portion of the general business credit; the remainder of the credit is a personal credit allowable to the extent of the excess of the regular tax (reduced by certain other credits) over the alternative minimum tax for the taxable year.21
For new qualified plug-in electric drive motor vehicles acquired and placed in service after 2009, a credit was available. The credit could vary from $2,500 to $7,500 depending on battery capacity (and subject to phaseout based on number of vehicles sold by the manufacturer). The portion of the credit attributable to property of a character subject to an allowance for depreciation was treated as part of the general business credit. The balance of the credit was generally treated as a nonrefundable personal credit.22 An alternative credit is available for certain plug-in electric cars placed in service after February 17, 2009 and before 2022. This credit is equal to 10 percent of cost, up to $2,500.23 The Inflation Reduction Act extended this tax credit through 2032 and expanded its availability, but the 2025 OBBB repealed the credit for tax years beginning after 2025. See Q 767 for details.
First-Time Homebuyer Credit
There was a first-time homebuyer credit available for a home purchased after April 8, 2008 and through April 2010.24 The credit was available for 10 percent of the purchase price, up to certain limits:
- For homes purchased in 2009 and 2010, the dollar limits were $8,000 ($4,000 for a married individual filing separately).
- For a home purchased after November 6, 2009 by a long-time resident treated as a first-time homebuyer, the dollar limit was only $6,500 ($3,250 for a married individual filing separately).
- For a home purchased before November 7, 2009, the credit was phased out based on AGI of $75,000 to $95,000 ($150,000 to $170,000 for a joint return).
- For a home purchased after November 6, 2009, the credit was phased out based on AGI of $125,000 to $145,000 ($225,000 to $245,000 for a joint return).
For a home purchased after November 6, 2009, the credit was not available to a person for whom a personal exemption was allowable to another person. The credit was not available for a home purchased after November 6, 2009 if the purchase price exceeded $800,000.
For a home purchased in 2008, the credit must generally be recaptured over a fifteen-year period beginning with the second year after the home is purchased. The recapture is accelerated if the home is sold or is no longer the taxpayer's principal residence. Credit recapture does not apply to a home purchased in 2009 or 2010 unless the home was disposed of, or ceases to be used as a primary residence, within three years of purchase. For a first-time homebuyer's credit that can be properly claimed in a year after 2008, the taxpayer can elect to claim the credit as of December 31 of the previous year.
Making Work Pay Credit
For 2009 and 2010, a "making work pay" credit was available equal to the lesser of (1) 6.2 percent of earned income or (2) $800 for a joint return and $400 for all others. The credit was reduced by 2 percent of the taxpayer's modified adjusted gross income in excess of $150,000 for a joint return and $75,000 for all others. The credit was also reduced by certain other benefits provided by ARRA 2009. The credit was not available for nonresident aliens, for persons for whom a personal exemption was claimed on another person's return, or an estate or trust.25
Adoption Tax Credit
Under the OBBB, a portion of the adoption tax credit is now refundable. The refundable portion for 2026 is $5,120. The maximum adoption tax credit for 2026 is $17,670, which begins to phase out for taxpayers with modified adjusted gross income (MAGI) in excess of $265,080 and completely phases out once a taxpayer's MAGI reaches $305,080.
Child and Dependent Care Credit
The child and dependent care tax credit provides a tax credit to offset the cost of qualifying work-related dependent care expenses (a dependent who is a child must be under age 13 to qualify). Those expenses can include the cost of physically caring for the dependent—and also include household expenses, such as hiring someone to help with cooking and cleaning for a dependent, as long as the expenses are primarily for the benefit of the dependent. The 2025 OBBB increased the otherwise available 35 percent credit to 50 percent for tax years beginning after 2025. The credit is now subject to phaseout. The 50 percent credit will be reduced by one percent for every $2,000 (or fraction thereof) by which the taxpayer's adjusted gross income for the tax year exceeds $150,000 (but not below 35 percent). The credit is further reduced (but never below 20 percent) by one percent for each $2,000 (or $4,000 for joint returns, or fraction thereof) by which the taxpayer's AGI exceeds $75,000 ($150,000 for joint returns).
COVID-Era Relief
For 2021 only, the dependent care tax credit was fully refundable under the American Rescue Plan Act (ARPA). The maximum credit percentage was increased from 35 percent to 50 percent of qualifying dependent care expenses (the credit phases down to 20 percent for taxpayers with income between $125,000 and $183,000). The level of qualifying dependent care expenses also increased for 2021—from $3,000 to $8,000 for a single qualifying dependent and from $6,000 to $16,000 for two or more qualifying dependents.
The IRS released FAQ to help taxpayers understand the expanded child and dependent care tax credit in 2021. To claim the credit, taxpayers were required to have earnings. The FAQ is clear that the amount of qualifying work-related expenses claimed cannot exceed the taxpayer's earnings.
Additionally, the taxpayer must subtract employer-provided dependent care benefits, including those provided through a flexible spending account, from total work-related expenses when calculating the credit. As in prior years, the more a taxpayer earned, the lower the percentage of work-related expenses that were taken into account in determining the credit.
However, the credit was fully refundable for the first time in 2021. An eligible taxpayer could receive the credit even if they owed no federal income tax. To be eligible for the refundable credit, a taxpayer (or the taxpayer's spouse on a joint return) was required to reside in the United States for more than half of the year.
To claim the credit for 2021, taxpayers completed Form 2441, Child and Dependent Care Expenses, and included the form when filing tax returns in 2022. In completing the form to claim the 2021 credit, the taxpayer had to provide a valid taxpayer identification number (TIN) for each qualifying person. Usually, this is the qualifying person's Social Security number.
1. Pub. Law No. 115-123.
2. IRC § 31(a).
3. IRC § 35.
4. Treas. Reg. § 1.31-2.
5. IRC § 32.
6. IRS FAQ, available at https://www.irs.gov/newsroom/irs-updates-questions-and-answers-about-the-tax-year-2021-earned-income-tax-credit.
7. IRC § 35.
8. IRC § 21.
9. IRC § 22.
10. IRC § 23.
11. IRC § 24.
12. IRC § 25A, as amended by ATRA, § 103.
13. IRC § 25B.
14. IRC § 25C, as amended by ATRA, § 401 and extended by the Tax Certainty and Disaster Relief Act of 2020.
15. IRC § 25D.
16. IRC §§ 53, 901.
17. IRC § 38(b).
18. IRC § 30C, as amended by the Inflation Reduction Act.
19. IRC § 30B.
20. See § 1348, ETIA 2005; IRC § 179A.
21. IRC § 30B(g).
22. IRC § 30D, as amended by ARRA 2009.
23. IRC § 30, as amended by ARRA 2009, ATRA and the Tax Certainty and Disaster Relief Act of 2020.
24. IRC § 36, as added by HERA 2008 and amended by ARRA 2009 and WHBAA 2009.
25. IRC § 36A, as amended by ARRA 2009.