State and Federal Tax Credits for U.S. Taxpayers: The Complete 2025–2026 Guide

What is still available, what quietly expired, how the carryover rules actually work, and the state credits taxpayers and business owners in California, New York, Texas, and Florida most often miss.

A tax credit is the most efficient line on any return. It reduces tax dollar for dollar, it works whether or not you itemize, and some credits pay out in cash even when you owe nothing. Yet credits are also the most volatile part of the Internal Revenue Code. They expire, they get reinstated retroactively, they get repealed mid-year, and they get replaced by entirely new mechanisms.

The last two years were the most volatile in a generation. The One, Big, Beautiful Bill Act (Public Law 119-21, signed July 4, 2025) made several credits permanent and larger while terminating nearly every clean energy and electric vehicle credit ahead of schedule. The enhanced health insurance subsidies lapsed on January 1, 2026. The Work Opportunity Tax Credit went into hiatus. The Employee Retention Credit acquired a hard statutory cutoff and a six-year assessment period. Meanwhile a whole class of credits became transferable and sellable for cash, which did not exist five years ago.

This guide covers what is actually claimable now — for the 2025 return and the 2026 tax year — for individuals and for businesses, at the federal level and in four states that between them cover a large share of U.S. taxpayers. Every dollar figure, form number, code section, and effective date below has been verified against IRS revenue procedures, form instructions, state revenue department publications, and enacted legislation.

How Tax Credits Actually Work

The Basic Mechanic

A credit is subtracted from the tax you owe, not from the income that gets taxed. If your federal income tax is $500 and you hold $500 of credits, your net liability is zero. If your tax is $4,300 and you qualify for $2,200 of Child Tax Credit, you owe $2,100. The credit is worth its full face value regardless of your tax bracket.

Credit Versus Deduction — and Why the Comparison Is Not Close

A deduction reduces taxable income. A credit reduces tax. In the 22% bracket, a $1,000 deduction saves $220 while a $1,000 credit saves $1,000. In the 12% bracket the same deduction saves $120 and the same credit still saves $1,000.

Two corrections to a claim that circulates widely. First, deductions are not simply “lost” once they take taxable income to zero — for a business, excess deductions can produce a net operating loss that carries forward under section 172, and the value is deferred rather than destroyed. Second, taxpayers cannot freely “switch from a deduction to a credit.” A handful of provisions offer an election — foreign income taxes may be taken as either a credit under section 901 or an itemized deduction — but most credits run the other way: claiming them requires you to reduce a related deduction. Section 280C requires a reduction of the wage or expense deduction for the research credit, the work opportunity credit, and the small employer health insurance credit, among others. The credit and the deduction are not interchangeable, and treating them as if they were is how a return ends up double-counting.

Refundable, Nonrefundable, and Partially Refundable

• Nonrefundable credits reduce tax to zero and no further. The Lifetime Learning Credit, the Saver’s Credit, the child and dependent care credit, and nearly every business credit work this way.
• Refundable credits pay out even with no tax liability. The Earned Income Tax Credit and the Premium Tax Credit are the principal examples.
• Partially refundable credits split. The Child Tax Credit is worth up to $2,200 per child for 2025 and 2026 with up to $1,700 refundable. The American Opportunity Tax Credit is up to $2,500 with up to $1,000 refundable. The adoption credit became partially refundable for the first time in 2025.

The distinction is not academic. A household with little or no tax liability gets nothing from a nonrefundable credit — which is exactly why Congress is replacing the nonrefundable Saver’s Credit with a direct federal deposit beginning in 2027.

Carrybacks and Carryforwards — the Rules People Get Wrong

This is the single most commonly misstated area in general tax writing, so here is the actual law.

For the general business credit under section 38, unused credits are carried back one year and forward twenty years under section 39. Not ten. Exceptions exist and matter:

• The credit for oil and gas production from marginal wells carries back five years.
• Applicable credits listed in section 6417(b) — the clean energy credits eligible for elective payment — carry back three years.
• No unused credit can generally be carried back to a tax year before the first year that credit was allowable. A “specified credit” under section 38(c)(4)(B) generally cannot be carried back to a year before that credit was first allowed against tentative minimum tax.

Credits are used first-in, first-out: carryforwards to the year (oldest first), then the current-year credit, then the carryback. Any qualified business credits still unused at the end of the twenty-year carryforward period — or when the taxpayer dies or the entity ceases to exist — may be taken as a deduction under section 196.

Personal credits follow entirely different rules, and most of them do not carry at all. The exceptions worth knowing:

• Adoption credit — nonrefundable portion carries forward up to five years.
• Foreign tax credit — carries back one year and forward ten.
• Residential Clean Energy Credit — the credit is terminated for new expenditures, but unused amounts from qualifying years still carry forward.
• Credit for prior year minimum tax — carries forward indefinitely on Form 8801.
• Saver’s Credit, Lifetime Learning Credit, child and dependent care credit — no carryforward at all. Unused amounts are simply gone.

The Section 38 Limitation

Business credits are capped by tax liability under a formula many owners have never seen: the general business credit generally cannot exceed net income tax less the greater of the tentative minimum tax or 25% of net regular tax liability above $25,000. That $25,000 floor is why a very small business can often absorb its entire credit while a mid-size one cannot. Corporations are allowed a general business credit equal to 25% of the excess of net income tax over $25,000.

How You Claim Credits

Individual credits flow to Form 1040 or Form 1040-SR either directly, through Schedule 3 (Additional Credits and Payments), or through Schedule 8812 for the child-related credits. Business credits are computed on a source form and then aggregated on Form 3800, General Business Credit. If you are a business owner and have never seen a Form 3800 attached to your return, that is worth investigating — it is where the components live.

Federal Tax Credits for Individuals and Families

Child Tax Credit and the Additional Child Tax Credit

For tax years beginning in 2025 and 2026, the Child Tax Credit is $2,200 per qualifying child, with the refundable Additional Child Tax Credit capped at $1,700 per qualifying child. Both figures are now permanent and indexed for inflation going forward.

The refundable portion is computed as 15% of earned income above $2,500, limited to $1,700 per child. That $2,500 threshold is where the frequently repeated line about “income exceeding $2,500” comes from — it is the earnings floor for the refundable computation, not an eligibility cutoff for the credit itself.

A qualifying child must be under 17 at the end of the year, must be related to you within the statutory categories, must have lived with you more than half the year, must not have provided more than half of their own support, and must be your dependent. Critically, the return must include a valid Social Security number for each qualifying child, and the taxpayer must have an SSN — on a joint return, at least one spouse. The credit phases out above $200,000 of modified AGI ($400,000 joint), reduced by $50 per $1,000 over the threshold. Claim it on Schedule 8812.

Credit for Other Dependents

A $500 nonrefundable credit for dependents who do not qualify for the Child Tax Credit — a 17-year-old, a supported college student, an elderly parent, a dependent with an ITIN. Same phase-out thresholds, same Schedule 8812, and you cannot claim it and the Child Tax Credit for the same person.

Child and Dependent Care Credit

Offsets the cost of care for a child under 13, or a spouse or dependent of any age incapable of self-care, so you can work or look for work. Qualifying expenses remain capped at $3,000 for one qualifying person and $6,000 for two or more.

For 2025 the credit rate tops out at 35% and drops quickly to 20%. Beginning in 2026 the top rate rises to 50%, phasing down in two stages: one percentage point for each $2,000 of AGI above $15,000 (floor 35%), then one point for each $2,000 — $4,000 on a joint return — of AGI above $75,000 ($150,000 joint), with a floor of 20%. In practice the rate hits 35% above $43,000 of AGI and 20% above roughly $103,000 single or $206,000 joint. Maximum 2026 credit: $1,500 for one qualifying person, $3,000 for two or more.

The companion change: the dependent care assistance program exclusion rose from $5,000 to $7,500 ($3,750 married filing separately) for 2026. Expenses reimbursed through an FSA reduce the expenses eligible for the credit, so the two must be coordinated, not stacked. Claim on Form 2441, and note that the care provider’s name, address, and taxpayer identification number are required — informal cash arrangements routinely cost families this credit.

Earned Income Tax Credit

The largest refundable credit in the Code, and the one the IRS estimates roughly one in five eligible taxpayers fails to claim.

Married filing jointly limits run higher: for 2025, $68,675 / $64,430 / $57,554 / $26,214 by family size; for 2026, the credit ends at $70,244 / $65,899 / $58,863 / $26,820. Investment income cannot exceed $11,950 for 2025 or $12,200 for 2026 — a hard cliff that disqualifies the entire credit if crossed by a dollar.

You need earned income (wages or net self-employment earnings), valid Social Security numbers for everyone claimed, and U.S. citizen or resident alien status all year. Married filing separately is generally disqualifying. With no qualifying children you must be at least 25 and under 65. Claimed on Schedule EIC, and by law the IRS cannot release EITC or Additional Child Tax Credit refunds before mid-February.

If the EITC was previously reduced or denied for anything other than a math error, you generally must file Form 8862 to claim it again. A denial for reckless or intentional disregard triggers a two-year ban; fraud triggers a ten-year ban. The same structure applies to the Child Tax Credit and the American Opportunity Tax Credit.

Adoption Credit

For adoptions finalized in 2025: maximum $17,280 per eligible child, with up to $5,000 refundable for the first time, phasing out between $259,190 and $299,190 of modified AGI. For 2026: $17,670 maximum, $5,120 refundable, phasing out between $265,080 and $305,080. The nonrefundable balance carries forward five years, but a carryforward can never later be converted into a refundable amount. Indian tribal governments now have the same authority as states to determine that a child has special needs. Computed on Form 8839.

Credit for the Elderly or the Disabled

Still on the books and still claimed on Schedule R, but the income and nontaxable-benefit thresholds have not been adjusted since 1983, so very few taxpayers qualify. It is worth a look for a client aged 65 or older with almost no Social Security income, or for a taxpayer under 65 who is permanently and totally disabled and receiving taxable disability income. Do not expect much.

Education credits

American Opportunity Tax Credit — up to $2,500 per eligible student: 100% of the first $2,000 of qualified expenses plus 25% of the next $2,000, with 40% (up to $1,000) refundable. Limited to the first four tax years of post-secondary education, requires at least half-time enrollment in a degree or credential program, and is denied to a student with a felony drug conviction. Phases out between $80,000 and $90,000 of modified AGI ($160,000 to $180,000 joint) and is unavailable to married taxpayers filing separately. The refundable portion is denied to a student subject to the kiddie tax rules.

Lifetime Learning Credit — up to $2,000 per return (20% of up to $10,000 of expenses), unlimited years, available for graduate work and single courses taken to improve job skills, no degree or enrollment-level requirement — but entirely nonrefundable and capped per return rather than per student. Same $80,000/$90,000 and $160,000/$180,000 phase-out, and those figures have not been indexed for any tax year beginning after December 31, 2020, so they tighten in real terms every year.

You cannot claim both for the same student in the same year, but with multiple students you can claim one of each on the same Form 8863. Expect to reconcile Form 1098-T against your actual adjusted qualified expenses — scholarships, grants, and 529 distributions all change the math, and the 1098-T does not do that work for you.

Income and Savings Credits

• Saver’s Credit (Form 8880) — 50%, 20%, or 10% of up to $2,000 of retirement contributions per person, maximum $1,000 each. For 2026 any credit is gone above AGI of $80,500 joint, $60,375 head of household, or $40,250 single (2025: $79,000 / $59,250 / $39,500). The 50% rate applies up to $48,500 joint, $36,375 head of household, and $24,250 for other filers in 2026. These are cliffs, not gradual phase-outs. 2026 is the final year for the retirement version of this credit.
• Saver’s Match (from 2027) — section 103 of the SECURE 2.0 Act replaces the credit with a federal deposit of 50% of the first $2,000 of contributions, up to $1,000 per person, paid directly into a retirement account. It is not limited by tax liability, so it finally reaches the low earners the credit never helped. First payments in 2028 for 2027 contributions; Treasury issued Notice 2026-48 in August 2026 describing the anticipated rules. The Saver’s Credit survives for ABLE account contributions, which Public Law 119-21 made permanent.
• Foreign Tax Credit (Form 1116) — for foreign income taxes paid or accrued. Carries back one year and forward ten. Available as a credit or an itemized deduction, and the credit is usually better.
• Credit for tax on undistributed capital gains (Form 2439) — where a mutual fund or REIT retained long-term capital gains and paid tax on them, shareholders claim a credit for their share.
• Credit for prior year minimum tax (Form 8801) — recovers alternative minimum tax paid in an earlier year attributable to deferral items.
• Excess Social Security tax withheld — not technically a credit but frequently the same result. If you worked for two or more employers and combined Social Security withholding exceeded the annual wage-base maximum, the excess is claimed as a payment on Schedule 3. Employers cannot coordinate this; you have to catch it.

Homeowner Credits

This category shrank dramatically. Two clarifications first: the Low-Income Housing Credit is a developer and investor credit under section 42, not a homeowner credit — it appears in the business section of this guide. And the “Residential Energy Efficient Property Credit” was renamed the Residential Clean Energy Credit years ago and has now been terminated.

What remains for homeowners:

• Mortgage Interest Credit (Form 8396) — for holders of a qualified Mortgage Credit Certificate issued under a state or local program. It is a credit for part of the mortgage interest paid, it requires the certificate to have been issued in connection with the purchase, and any unused amount carries forward three years. Frequently missed because the certificate is issued at closing and never mentioned again.
• Residential Clean Energy Credit (§25D) — 30% of solar, wind, geothermal, fuel cell, and battery storage costs. Terminated for expenditures made after December 31, 2025. The statute treats an expenditure as made when the original installation is completed, so a system paid for in 2025 but not completed until 2026 does not qualify. Unused amounts from qualifying years still carry forward.
• Energy Efficient Home Improvement Credit (§25C) — up to $3,200 a year for heat pumps, insulation, doors, windows, and home energy audits. Terminated for property placed in service after December 31, 2025.

Both are claimed on Form 5695 for the years in which they applied.

Healthcare Credits

Premium Tax Credit — refundable, for a qualified health plan bought through the Health Insurance Marketplace, usually taken in advance as the Advance Premium Tax Credit paid directly to the insurer. Two things changed:

• The enhanced Premium Tax Credit expired December 31, 2025. The House passed a three-year extension on January 8, 2026 by a vote of 230 to 196, but as of mid-2026 the Senate had not acted. For 2026 coverage that means the 400%-of-poverty eligibility cliff is back and the applicable percentages reverted to higher pre-2021 levels. The base credit itself has no sunset — only the temporary enhancement lapsed.
• Section 71305 of the One, Big, Beautiful Bill Act removed the cap on repayment of excess advance payments effective for tax years beginning after December 31, 2025. Through 2025, a household below 400% of poverty had its repayment limited to a set dollar amount. From 2026 forward, excess advance payments are repaid in full. A raise, a bonus, or a good self-employment quarter can now generate a four- or five-figure balance due.

Reconcile on Form 8962 using Form 1095-A. Married filing separately generally disqualifies you, with narrow exceptions for domestic abuse and spousal abandonment.

Health Coverage Tax Credit — this one is simply gone. The HCTC expired for tax years beginning after 2021, and the IRS has instructed taxpayers to disregard the Form 8885 reference in the Schedule 3 instructions. Any checklist still listing it is at least four years out of date.

Credits That No Longer Exist (But Still Appear on Old Checklists)

These come up constantly in consultations because they are still listed on websites, in older articles, and in software help files. None of them is claimable now.

Two more scheduled endings worth calendaring: the Alternative Fuel Vehicle Refueling Property Credit (§30C), which covers EV charging equipment, terminates for property placed in service after June 30, 2026; and the New Energy Efficient Home Credit (§45L) ends for homes acquired after the same date.

Federal Tax Credits for Businesses

Business credits are where the largest unclaimed amounts sit, for a simple structural reason: they are computed on source forms that nobody opens unless they already know the credit exists. A business owner who has never been asked about hiring, research activity, retirement plan startup costs, or employee health premiums will never be told they qualified.

The General Business Credit Framework

Nearly all business credits are components of the General Business Credit, aggregated on Form 3800. The mechanics established earlier apply: nonrefundable, limited by section 38, one-year carryback and twenty-year carryforward under section 39, used first-in first-out, with unused qualified business credits ultimately deductible under section 196.

Two definitions inside Form 3800 matter for planning. An eligible small business — a non-publicly-traded corporation, partnership, or sole proprietorship with average annual gross receipts of $50 million or less over the preceding three years — gets more favorable treatment for certain credits against tentative minimum tax. A qualified small business is defined differently and governs the research credit payroll tax election discussed below. The two terms are not interchangeable.

Currently Available Components

These are the general business credit components in current use, with the form each is computed on:

Components That Are Carryforward-Only

These credits no longer generate new amounts. If you hold a carryforward you can still use it, but nothing new is earned. Any list presenting them as current opportunities is out of date:

• Biofuel producer credit
• Renewal community employment credit
• Indian employment credit
• Nonconventional source fuel production credit
• Energy efficient appliance credit
• Alternative motor vehicle credit
• Qualified plug-in electric vehicle credit
• Mine rescue team training credit
• Agricultural chemicals security credit
• Sustainable aviation fuel credit
• Qualifying therapeutic discovery project credit
• Employee retention credit for employers affected by qualified disasters
• General credits from an electing large partnership

Carryforwards of credits no longer listed on Form 3800 are reported on Part IV, line 2zz, with a statement identifying the credit.

The Credits Most Small Businesses Are Actually Leaving on the Table

Research credit (§41) with the payroll tax offset. The research credit is not confined to laboratories — software development, process engineering, formulation work, and product design routinely qualify. The provision that matters most for early-stage companies is section 41(h): a qualified small business may elect to apply up to $500,000 of its research credit against the employer share of payroll taxes instead of income tax, converting the credit into cash for a company with no income tax liability. Computed on Form 6765. Separately, the One, Big, Beautiful Bill Act restored immediate expensing of domestic research and experimental expenditures, reversing the mandatory capitalization that had inflated taxable income for engineering and technology firms since 2022.

Small Business Health Care Tax Credit (§45R). Up to 50% of premiums paid (35% for tax-exempt employers) for employee health coverage. For tax years beginning in 2025 you must have fewer than 25 full-time equivalent employees, pay average annual wages under $67,000 per FTE, cover at least 50% of the premium cost under a qualifying arrangement, and buy coverage through a SHOP Marketplace. Two separate reductions apply — one above 10 FTEs and one above $33,300 of average wages (rising to $34,100 for 2026) — and together they can zero the credit even inside the outer limits. Owners, partners, more-than-2% S corporation shareholders, and their family members are excluded from the calculation. Available for only a two-consecutive-year credit period, so the year you start claiming is itself a decision. Form 8941.

Work Opportunity Tax Credit (§51) — in hiatus. Up to $2,400 per qualifying hire and considerably more for certain veteran categories, for employees drawn from targeted groups including veterans, ex-felons, SNAP recipients, long-term unemployment recipients, and designated community residents. Authorization lapsed for employees who begin work after December 31, 2025, and state workforce agencies were directed not to issue certifications during the lapse. The credit has lapsed repeatedly since 1996 and been reinstated retroactively each time, because extending the ending date in the statute automatically covers the gap. Employers who captured those retroactive credits were the ones who kept screening. Keep filing Form 8850 with your state workforce agency within 28 days of each eligible hire — unfiled paperwork cannot be recreated later.

Employer-Provided Childcare Credit (§45F). For 2025, 25% of qualified childcare facility expenditures plus 10% of resource and referral expenditures, capped at $150,000. Beginning in 2026 the rate rises to 40% with a $500,000 cap, and an eligible small business meeting a $25 million average gross receipts test gets 50% with a $600,000 cap. Both caps are indexed after 2026. The credit applies to contracting with a qualified facility, not only building one. Form 8882.

Employer Credit for Paid Family and Medical Leave (§45S) — now permanent. A credit of 12.5% to 25% of wages paid to qualifying employees on leave, for up to 12 weeks, scaled to the share of normal wages the policy replaces. Made permanent by the One, Big, Beautiful Bill Act with changes first effective for tax years beginning in 2026: employers may elect to count employees after six months of service instead of a year; a new premium method allows the credit to be computed from insurance premiums paid rather than wages; and the credit is now available in states with mandatory paid leave programs for benefits paid above the state benefit. The written policy must provide at least two weeks of annual paid leave for full-time qualifying employees, payment of at least 50% of normal wages, and specific non-interference language. The IRS issued Notice 2026-28 in August 2026 on the premium method. Employers who want the 2026 credit need a compliant written policy for the full year. Form 8994.

Retirement plan credits for small employers. With 100 or fewer employees who received at least $5,000 of compensation in the preceding year: a startup cost credit of 100% of qualified costs for employers with 1–50 employees (50% for 51–100), capped at $5,000 per year for three years; an employer contribution credit of up to $1,000 per employee earning under $100,000 for the first five plan years on a declining percentage; a $500 per year auto-enrollment credit for three years; and a military spouse participation credit under section 45AA. All on Form 8881. Between them, a small employer can often cover most of the true cost of launching a plan.

Disabled Access Credit (§44). 50% of eligible access expenditures between $250 and $10,250 — a maximum credit of $5,000 per year, and Form 3800 will not accept more than that. Form 8826.

Credit for Employer Social Security Taxes Paid on Tips (§45B). For food and beverage establishments, a credit for the employer FICA paid on reported tips above the amount needed to bring wages to the applicable minimum. Restaurants with tipped staff who have never claimed this are usually leaving several thousand dollars a year unclaimed. Form 8846.

New Markets Tax Credit (§45D) — now permanent. Previously scheduled to expire in 2025, the program was made permanent by the One, Big, Beautiful Bill Act with a $5 billion annual allocation cap. Investment flows through community development entities that receive allocations from the CDFI Fund and lend to qualified active low-income community businesses. Structurally complex, but for a business located in a qualifying census tract it can amount to a substantial subsidized capital source. Form 8874.

Low-Income Housing Credit (§42). The principal federal subsidy for affordable rental housing, claimed by developers and investors over a ten-year credit period. The One, Big, Beautiful Bill Act increased the state housing credit ceiling and eased the bond-financing threshold, expanding the pipeline of qualifying projects. Form 8586.

Clean Energy Business Credits: Still Available, but With New Conditions

The residential energy credits are gone. The commercial and utility-scale credits largely survive, but the One, Big, Beautiful Bill Act attached accelerated deadlines and an entirely new compliance regime:

• Clean Electricity Production (§45Y) and Investment (§48E) credits — for wind and solar, projects that begin construction more than twelve months after enactment must be placed in service by the end of 2027 to qualify. Projects beginning construction after 2033 generally do not qualify at all.
• Prohibited foreign entity (FEOC) rules — new restrictions deny credits under sections 45Y, 48E, 45X, 45Q, 45U, and 45Z where prohibited foreign entities are involved, including a “material assistance cost ratio” test on the components in a facility. The IRS issued Notice 2026-15 in February 2026 providing interim guidance on the computation, safe harbors, supplier certification, and documentation standards. The material assistance rules carry a six-year statute of limitations and enhanced penalties, including penalties on suppliers for non-complying certifications.
• Clean Fuel Production Credit (§45Z) — extended through the end of 2029, with revised emissions methodology and a new feedstock geography restriction.
• Small agri-biodiesel producer credit (§40A) — restored by Public Law 119-21, reported on Form 8864, and eligible for transfer for fuel sold or used after June 30, 2025.
• Section 179D energy efficient commercial buildings deduction — repealed for property whose construction begins after June 30, 2026. A deduction rather than a credit, but on the same clock.

Elective Payment and Transferability — the Change Nobody Mentions

This is the most significant structural development in business credits in decades, and it is absent from essentially every pre-2023 credit article.

Elective payment (section 6417), often called direct pay, lets an applicable entity — a tax-exempt organization, a state or local government, a tribal government, the TVA, an Alaska Native Corporation, or a rural electric cooperative — treat certain clean energy credits as a payment of tax, producing a refund even with no tax liability. Certain taxpayers can also elect direct pay for the carbon oxide sequestration credit, the clean hydrogen production credit, and the advanced manufacturing production credit.

Transferability (section 6418) lets an eligible taxpayer sell all or part of a qualifying credit to an unrelated party for cash. The buyer takes the credit; the seller gets cash that is not included in income. Transferable credits include sections 30C, 45, 45Q, 45U, 45V, 45X, 48, 48C, 45Y, 45Z, 48E, and now the small agri-biodiesel producer credit.

Both require pre-filing registration with the IRS before the return is filed and a registration number entered on the source form. A transfer requires a signed transfer election statement — Schedule A (Form 3800) or an equivalent document — attached to both parties’ returns, and the seller must supply specified documentation to the buyer. Registration numbers are valid for one year only and must be renewed. Missing the registration step is fatal to the election, not a curable defect.

The COVID-Era Credits: What Happened, and Why It Still Matters

A correction first, because it appears in a great deal of older writing: the Paycheck Protection Program was a forgivable loan program administered by the SBA, not a tax credit. It never appeared on a tax return as a credit. The Employee Retention Credit was the tax credit, and its aftermath is now one of the most active areas of IRS enforcement.

Employee Retention Credit — the Current Legal Position

• Section 70605(d) of the One, Big, Beautiful Bill Act prevents the IRS from allowing or refunding ERCs after July 4, 2025 for the third and fourth quarters of 2021 if the claim was filed after January 31, 2024 — even if the business fully met the eligibility requirements. A claim postmarked or properly submitted on or before that date counts as timely filed.
• If a claim filed after January 31, 2024 was actually refunded or credited before July 4, 2025, the IRS has said the limitation does not apply — though other compliance activity can still produce an adjustment.
• The assessment period for those quarters was extended to six years, so exposure runs well past the ordinary statute.
• The 20% penalty under section 6676 for an excessive refund claim was extended from income tax to employment tax, bringing ERC claims squarely within its reach.
• Additional penalties apply to ERC promoters who failed due diligence requirements.

A disallowance arrives as Letter 105-C. Appeal rights to the IRS Independent Office of Appeals exist, and there is a two-year window to resolve the claim or file a refund suit — a window that does not pause while an administrative appeal is pending. That last detail has cost businesses their entire claim.

Promoted Credit Schemes

Two recurring schemes put ordinary taxpayers at risk of frivolous return penalties. The fuel tax credit (Form 4136) is meant for off-highway business and farming use and almost never applies to an individual. The sick and family leave credits (Form 7202) applied only to certain self-employed taxpayers for 2020 and 2021 and are still being claimed years later by people who never qualified. Both are promoted aggressively on social media. The exposure lands on the taxpayer who signed the return, not on the promoter.

Related Incentives That Are Not Credits

Three items commonly bundled into credit discussions are actually exemptions or exclusions. The distinction matters because they never appear on Form 3800 and are claimed in entirely different ways.

The Portfolio Interest Exemption

Interest paid to a nonresident alien individual or foreign corporation on qualifying registered obligations is generally exempt from the 30% U.S. withholding tax on fixed or determinable annual or periodical income. It is an inbound investment incentive, and it comes with conditions: the recipient generally cannot be a 10% shareholder of the payor, cannot be a bank receiving the interest on an extension of credit in the ordinary course of business, and cannot be a controlled foreign corporation related to the payor. Proper Form W-8 documentation is essential; without it, the withholding agent has primary liability.

Qualified Private Activity Bonds

Interest on qualified private activity bonds is generally excluded from federal gross income, which allows the issuer to place debt at below-market rates and lets a qualifying project — exempt facility, qualified small issue manufacturing, qualified 501(c)(3), and others — access cheaper capital. The volume of these bonds is constrained by an annual state ceiling; for calendar year 2026 the ceiling is the greater of $135 multiplied by state population or $397,625,000. Note that the interest is generally an item of tax preference for alternative minimum tax purposes on certain categories of these bonds.

Opportunity Zones

Not a credit either — a deferral and basis-step-up regime for reinvested capital gains. Worth naming here because the One, Big, Beautiful Bill Act made the Opportunity Zone program permanent, which changes the planning horizon substantially for anyone sitting on appreciated assets.

State Tax Credits: California, New York, Texas, and Florida

State credits are claimed on state returns and are governed entirely by state law. Some mirror a federal credit, some are refundable where the federal analogue is not, and some — like California’s — extend to ITIN holders who cannot claim the federal equivalent. A federal error propagates into any state credit calculated as a percentage of the federal one, which is why state and federal returns should never be prepared by people who are not talking to each other.

California — Individual Credits

• California Earned Income Tax Credit (CalEITC) — up to $3,756 for tax year 2025, for workers with earned income of at least $1 and no more than $32,900. Refundable, ITIN filers qualify, claimed on FTB Form 3514, and generally claimable for up to four prior years by filing or amending.
• Young Child Tax Credit — up to $1,189 for 2025 if you qualify for CalEITC and had a child under 6 at year end. You can qualify with zero earned income provided total wages do not exceed $35,640 and total net loss does not exceed $35,640.
• Foster Youth Tax Credit — up to $1,189, or $2,378 where both spouses or registered domestic partners qualify, for current and former foster youth aged 18 through 25 who were in California foster care at age 13 or older and qualify for CalEITC. Foster status must be verified.
• Nonrefundable Renter’s Credit — $60 (single or married/RDP filing separately) or $120 (joint, head of household, or qualifying surviving spouse), where California income for 2025 is $53,994 or less or $107,987 or less respectively, you paid rent for at least half the year on non-exempt property, and no property tax exemption applied. Legislation enacted in 2025 would raise the credit to $250 or $500 depending on filing status and dependents, but only for years in which the increase is specifically funded in the annual budget act.
• Child and Dependent Care Expenses Credit — a nonrefundable percentage of the allowable federal credit, available where California AGI is $100,000 or less.
• Child Adoption Costs Credit — 50% of qualified costs up to $2,500 per child, for adoptions of children in the custody of a California public agency.
• Dependent Parent Credit, Joint Custody Head of Household Credit, and Senior Head of Household Credit — narrow, frequently missed, easy to substantiate.
• College Access Tax Credit — for contributions to the California College Access Tax Credit Fund.

California — Business Credits

• California Competes Tax Credit — a negotiated, competitive income tax credit administered by GO-Biz for businesses locating, staying, or expanding in California. Applications are accepted in three periods each fiscal year and evaluated on fourteen factors including jobs created, investment, and strategic importance. The fiscal year 2025–26 allocation was roughly $922.7 million; over $180 million is available for fiscal year 2026–27. This is an application program, not a checkbox on a return — the agreement has to be negotiated and signed before the credit exists.
• California Research Credit — a state analogue to the federal section 41 credit, computed on FTB Form 3523, with different rates and its own base-amount rules. Unused amounts carry forward indefinitely.
• Homeless Hiring Tax Credit — $2,500 to $10,000 per eligible employee based on hours worked, capped at $30,000 per taxable year, for tax years beginning in 2022 through December 31, 2026. Requires employee certification and a tentative credit reservation from the FTB shortly after hiring. Unused credit carries over three years.
• New Employment Credit — for qualified full-time employees hired in designated geographic areas. It requires a tentative credit reservation within 30 days of the hire and FTB Form 3554 filed with a timely original return. This credit carries a statutory sunset, so confirm availability for the specific year before relying on it.
• Motion picture and television credit — administered through the California Film Commission on a competitive application basis, expanded substantially by 2025 legislation.
• Pass-Through Entity Elective Tax credit — not a subsidy but a federal SALT-cap workaround. Senate Bill 132, signed June 27, 2025, extended the PTE elective tax and credit through tax years beginning before January 1, 2031 (the original sunset was after 2025). SB 132 also changed the prepayment rules: beginning with 2026, missing the June 15 prepayment no longer voids the election, but the owner’s credit is reduced by 12.5% of their share of the unpaid amount. Forms 3804, 3893, and 3804-CR.
• Main Street Small Business Tax Credit II — a 2021-only program. Only carryovers remain; there is nothing new to claim.

New York — Individual Credits

• Empire State Child Credit — substantially enhanced. For tax year 2025: $1,000 per qualifying child under age four, plus $330 per qualifying child aged four through 16. For 2026 and 2027: $1,000 per child under four and $500 per child aged four through 16. Refundable, full-year residents only, at least one qualifying child under 17 at year end. The credit is reduced by $16.50 for every $1,000 of federal AGI above $110,000 (joint), $75,000 (single, head of household, or qualifying surviving spouse), or $55,000 (married filing separately). Beginning with 2025 New York decoupled from the federal child tax credit, so you no longer need to have claimed the federal credit to be eligible. A valid SSN or ITIN is required for the taxpayer and each child. Form IT-213.
• New York State Earned Income Credit — refundable, for working taxpayers earning less than $68,675. Combined federal, New York State, and New York City earned income credits can reach $12,873 for a family with three or more qualifying children.
• Noncustodial Parent Earned Income Credit — for a parent making child support payments through the New York State Support Collection Unit. Form IT-209.
• College Tuition Credit — limited to $400 per eligible student, claimed on Form IT-272 if you did not take the college tuition itemized deduction on Form IT-196. Full-year residents only.
• Child and Dependent Care Credit — a percentage of the federal credit, and refundable in New York.
• Household Credit and the New York City Household Credit — small, income-tested credits. For the New York City version, federal AGI generally cannot exceed $12,500 (single) or $22,500 (joint), and you cannot be claimed as a dependent.
• Real property tax credit — for lower-income households (a household gross income test around $18,000) who occupied the same New York residence for at least six months.

New York — Business Credits

New York maintains one of the largest business credit menus in the country, and also one of the most heavily revised. Programs that were live a few years ago — the Empire Zone credits, START-UP NY, the COVID-era restaurant return-to-work credit, the minimum wage reimbursement credit — have sunset or wound down, though carryovers may persist. Currently active programs include the Excelsior Jobs Program credit, the Empire State film production and post-production credits, the Empire State musical and theatrical production credit, the investment tax credit and its financial-services variant, the employment incentive credit, the Employee Training Incentive Program (E-TIP) credit, the Empire State apprenticeship credit, the New York Youth Jobs Program credit, the hire a veteran credit, the employment of persons with disabilities credit, the life sciences research and development credit, the farmers’ school tax credit, the farm workforce retention credit, the farm donations to food pantries credit, the brownfield credits, the historic properties rehabilitation credit, the long-term care insurance credit, the low-income housing credit, and the alcoholic beverage production credit.

Most New York business credits require an application, a certificate of eligibility, or an allocation from an administering agency before the credit exists. Discovering the program at filing time is generally too late.

Texas

Texas has no individual income tax, so there are no personal income tax credits to claim. Business incentives run through the franchise tax (the Texas margin tax) and the sales and use tax.

The significant recent development is Senate Bill 2206, signed June 2025 and effective January 1, 2026, which overhauled the state’s research and development incentives:

• The prior structure — a choice between a franchise tax R&D credit and a sales and use tax exemption on R&D equipment — was repealed. The sales tax exemption is gone for property acquired after January 1, 2026.
• The franchise tax credit rate increased from 5% to 8.722% of qualified research expenses above the base amount, and to 10.903% for research conducted in collaboration with a Texas institution of higher education. Where an entity has no Texas qualified research expenses in the base years, the rate rises from 2.5% to 4.361%.
• Qualified research expenses now conform to the federal definition — specifically, the amount reported on line 48 of Form 6765 attributable to research conducted in Texas — which removes a long-standing divergence and reduces documentation burden.
• The credit remains capped at 50% of franchise tax liability, with a 20-year carryforward, and is nontransferable. Unused credits from the pre-2026 regime must be used first.
• New: a refundable credit is available to certain entities — those owing under $1,000 of franchise tax, those with revenue under roughly $2.47 million for the annualized period, or qualifying veteran-owned startups.

Businesses that used the sales tax exemption in 2025 cannot claim the new credit for that same period. Equipment purchases straddling the transition need to be planned deliberately, because the up-front sales tax cost is now real and the offset arrives later as a credit.

Florida

Florida also has no individual income tax. Incentives run through the corporate income tax and certain other state taxes, which means pass-through owners generally cannot use them — a point that surprises many Florida business owners.

• Research and Development Tax Credit — a 10% corporate income tax credit on qualified research expenses above a base amount, limited to certified qualified target industry businesses (manufacturing, life sciences, information technology, aviation and aerospace, homeland security and defense, cloud IT, marine sciences, materials science, nanotechnology). Nonrefundable, carries forward, and cannot exceed 50% of remaining tax liability. The program has a statewide annual cap and operates first-come, first-served through a short application window each March — the 2026 window ran March 20 through March 26 for expenses incurred in 2025. A certification letter from the Florida Department of Commerce is required. Section 220.196, Florida Statutes; Form F-1196.
• Child Care Tax Credits Program — credits against corporate income tax and certain other taxes for establishing or operating an eligible employee child care facility, or paying an eligible facility on an employee’s behalf. The program has been extended with allocations available through state fiscal year 2027–28.
• Strong Families Tax Credit — dollar-for-dollar credit for contributions to eligible charitable organizations. The program cap increased from $40 million to $53.1 million for state fiscal years 2026–27 and 2027–28, with certain allocation limitations beginning in 2027–28.
• Community contribution tax credit — 50% of a qualified community contribution to an eligible sponsor for a qualifying project.
• Qualified Target Industry Tax Refund and various capital investment, urban high-crime area, and rural job credits — all application-driven, all requiring certification before the fact.

One structural note specific to Florida: the state does not allow an adjustment to federal taxable income for federal credits unless the Florida Statutes specifically provide one. The section 280C wage add-back is allowed; most others are not.

If You Operate in More Than One State

Multi-state businesses face two related problems. First, credits are generally nonrefundable and limited by state tax liability, so a credit earned in a state where you have little apportioned income may be worth far less than its face value. Second, most valuable state credits require pre-approval, certification, or an allocation reservation before or shortly after the qualifying event — a hire, a purchase, an investment. Federal credits are usually claimed retroactively at filing. State credits usually are not. That single difference accounts for most of the state credit value that businesses lose.

Compliance: Where Credit Claims Go Wrong

Refundable Credit Examinations

EITC and Child Tax Credit examinations are usually correspondence audits. The IRS issues a notice — frequently a CP75 — freezing the refund and requiring proof of residency, relationship, and support for each child: school records, medical records, a landlord letter, benefit statements. A complete, timely response usually restores the credit. Ignoring it results in disallowance, mandatory Form 8862 going forward, and in the worst case a two- or ten-year ban.

Paid preparers carry their own exposure — a $665 penalty per failure for returns filed in 2027 — for failing to meet due diligence requirements on head of household status, the EITC, the Child Tax Credit, and the American Opportunity Tax Credit. That is why a competent preparer asks pointed questions about who lived where and for how long.

Business Credit Substantiation

Research credit claims on amended returns face heightened requirements. For a section 41 credit claimed on an amended return or administrative adjustment request that was not on the original return, or that increases the amount originally reported, the IRS requires five specific items for each business component: the factual basis of the claim, the research activities performed, the individuals who performed each activity, the information each individual sought to discover, and the total qualified wage, supply, and contract research expenses. If you submit a credit study, you must identify the exact pages containing those five items. Claims that do not meet the requirement are treated as deficient.

What to Do if a Credit Is Denied, Delayed, or Clawed Back

1. Read the notice and identify the deadline. A CP75 requesting documentation, a CP2000 proposing an adjustment, a Letter 105-C disallowing a claim, and a math error notice each carry different response windows and different appeal rights.
2. Do not simply refile the same numbers. Repeating a disallowed position without addressing the identified defect is the most common mistake and, with the EITC and Child Tax Credit, can trigger a multi-year ban.
3. Build the documentation the statute actually requires. Residency, relationship, support, enrollment, certification, allocation reservation — every credit has its own proof standard, and general bank records rarely satisfy any of them.
4. Preserve appeal rights. The IRS Independent Office of Appeals is a separate function with authority to settle on the hazards of litigation. A math error notice carries its own 60-day window to request abatement before assessment becomes final.
5. Watch the refund statute. A refund claim generally must be filed within three years of filing the return or two years of paying the tax, whichever is later.

How Far Back Can You Claim a Credit You Missed?

Generally three years federally. In 2026 that means 2022, 2023, and 2024 returns can still be amended on Form 1040-X to claim credits you were entitled to and never took — a missed EITC, an unclaimed education credit, an adoption credit, a small employer health insurance credit your prior preparer skipped, a research credit nobody asked about. In California, CalEITC can generally be claimed for up to four prior years. For businesses, an unused general business credit can be carried back one year by amended return or by an application for tentative refund on Form 1045 or Form 1139 — and the tentative refund application generally must be filed by the end of the tax year following the year the credit arose.

A prior-year credit review is the single most reliable source of found money in the code, and it requires nothing more than access to three years of returns.

Corrections to Advice Still in Circulation

• “Business credits carry back one year and forward ten.” Twenty, not ten, under section 39 — with a five-year carryback for marginal well production credits and a three-year carryback for section 6417(b) credits.
• “You can always switch from a deduction to a credit.” Almost never. A few provisions offer an election (foreign taxes), and many credits actually require you to reduce a related deduction under section 280C.
• “Tax credits are of no value if you have a net operating loss.” Not quite. Nonrefundable credits are limited by liability, but the general business credit carries back one year and forward twenty, refundable credits pay out regardless of liability, elective payment converts certain credits into cash for eligible entities, and transferability lets others be sold for cash.
• “Deductions are lost once they take income below zero.” For a business, excess deductions generally become a net operating loss that carries forward. The value is deferred, not destroyed.
• “The Low-Income Housing Credit is a homeowner credit.” It is a developer and investor credit under section 42.
• “Claim the Recovery Rebate Credit or advance Child Tax Credit payments.” Both programs ended, and the final Recovery Rebate Credit deadline was April 15, 2025.
• “The Health Coverage Tax Credit is available for displaced workers.” It expired for tax years beginning after 2021.
• “PPP was a tax credit.” It was an SBA loan program. The Employee Retention Credit was the tax credit — and it now carries a hard filing cutoff, a six-year assessment period, and a 20% erroneous-claim penalty extended to employment tax.
• “Most tax credits are not refundable, so there is nothing to gain if I owe little.” Two of the largest — the EITC and the Premium Tax Credit — are fully refundable, and the Child Tax Credit, the AOTC, and the adoption credit are partially refundable.

Frequently Asked Questions

How Mike Habib, a Federally Licensed Enrolled Agent, Helps

As a federally licensed Enrolled Agent governed by Treasury Department Circular 230, Mike Habib is authorized to represent taxpayers before the Internal Revenue Service in all fifty states, at every administrative level — examination, collection, and appeals — as well as before the California Franchise Tax Board, the Employment Development Department, and the California Department of Tax and Fee Administration.

Credits are where tax planning and representation meet. The same knowledge that identifies an unclaimed credit is what defends it when the IRS or a state agency challenges it, and the consequences of a mishandled response — multi-year bans, disallowed carryforwards, repayment of advance subsidies, an ERC clawback inside a six-year window — outlast the year in question.

Working directly with Mike, you get:

• A full credit review of your open years. Most new clients have at least one unclaimed credit sitting in an amendable federal year, and California allows four years for CalEITC. Mike reviews what is recoverable and quantifies it before any work begins.
• Correct handling of the 2025 and 2026 rule changes. Permanent Child Tax Credit amounts, the refundable adoption credit, the rewritten child and dependent care percentages, the terminated energy and vehicle credits, the removal of the advance Premium Tax Credit repayment cap, and the WOTC hiatus each require different treatment than prior-year returns.
• Form 3800 done properly. Identifying which components apply, computing the section 38 limitation, tracking carryforwards with the required statements, and handling elective payment and transfer registrations before the return is filed.
• Employee Retention Credit defense. Letter 105-C disallowances, examinations inside the extended six-year assessment period, section 6676 penalty exposure, and unwinding promoter-prepared claims.
• EITC, Child Tax Credit, and education credit examinations. Assembling the residency, relationship, and support documentation the IRS actually accepts, responding within the notice deadline, and taking the matter to the Independent Office of Appeals when the examiner is wrong.
• Multi-state credit coordination. California, New York, Texas, and Florida each require different pre-approval steps, and a missed reservation deadline is not curable at filing.
• Direct access. Every engagement is handled personally by Mike. There is no junior staffer learning your file, and no handoff between the person who sold the engagement and the person doing the work.

With more than twenty years of experience — including service as Controller at Xerox Corporation and Director of Finance at AEG before building this practice — Mike brings the perspective of someone who has sat on both sides of a set of books. The firm is a BBB A+ Accredited Business and holds memberships in the National Association of Enrolled Agents, the California Society of Enrolled Agents, and the National Association of Tax Professionals.

Get an Evaluation — Talk to Mike Directly

If nobody has reviewed your last three years specifically for missed credits, there is a reasonable chance money is sitting in an amendable return. If the IRS or a state agency has already questioned a credit you claimed, the response you file next determines the outcome, and the deadline on that notice is not negotiable.

Every engagement is quoted as a flat fee, based on the scope of work your situation actually requires, and agreed before any work starts. No hourly billing, no surprise invoices, no meter running while you ask a question.

Call 562-204-6700 or 1-877-78-TAXES [1-877-788-2937], or visit myirstaxrelief.com, to schedule a confidential consultation with Mike Habib, EA. Based in Whittier, Los Angeles County, California, serving individuals and businesses in all fifty states and Americans living abroad.

Sources and Verification

Figures, form numbers, code sections, and effective dates in this guide were verified against primary sources current as of August 2026:

IRS Instructions for Form 3800 and Schedule A, General Business Credit (2025); IRS Revenue Procedure 2025-32 (2026 inflation-adjusted amounts); IRS Revenue Procedure 2024-40 (2025 amounts); IRS Notice 2025-67 (2026 retirement plan limits and Saver’s Credit thresholds); IRS Notice 2026-48 (Saver’s Match); IRS Notice 2026-28 (section 45S premium method); IRS Notice 2026-15 (interim FEOC material assistance guidance for sections 45Y, 48E, and 45X); IRS Instructions for Forms 8839, 8941, 8881, 8880, 8863, 8962, 2441, 5695, and 8885; IRS guidance that the Health Coverage Tax Credit expired December 31, 2021; IRS Fact Sheet 2025-07 (Employee Retention Credit limitations under OBBBA section 70605(d)); Internal Revenue Code sections 21, 23, 24, 25A, 25B, 25C, 25D, 32, 38, 39, 41, 42, 44, 45B, 45D, 45E, 45F, 45R, 45S, 45T, 45AA, 45Y, 45Z, 48E, 51, 196, 280C, 6417, 6418, and 6433; Public Law 119-21 (the One, Big, Beautiful Bill Act), enacted July 4, 2025; Congressional Research Service reports R43729, R48290, IF11159, and IN12611; California Franchise Tax Board credit pages and California Senate Bills 132, 167, and 175; California Governor’s Office of Business and Economic Development (GO-Biz) California Competes program notices; New York State Department of Taxation and Finance credit pages and Form IT-213 instructions; Texas Senate Bill 2206 (89th Legislature) and Texas Comptroller franchise tax R&D credit guidance; and Florida Department of Revenue Tax Information Publications and corporate tax incentive pages.

Important: tax law changes, and several provisions described here are the subject of pending legislation — most notably the enhanced Premium Tax Credit and the Work Opportunity Tax Credit. This guide is general information, not advice for your specific situation. Confirm current figures and your own eligibility before acting.

© 2026 Mike Habib, EA. All rights reserved.

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