Federal Tax Credits: What They Are, Who Qualifies, and What You Can Still Claim

An updated, plain-English guide to federal and California tax credits for the 2025 and 2026 tax years — including everything the One, Big, Beautiful Bill Act changed, and which credits quietly disappeared.

Nobody enjoys writing a check to the IRS. But most people write a larger one than they need to, because they treat tax credits as an afterthought instead of a planning tool. A credit is the most powerful line on your return: it comes off your tax bill dollar for dollar, and some credits pay you even when you owe nothing at all.

The rules changed dramatically in 2025 and 2026. The One, Big, Beautiful Bill Act (Public Law 119-21, signed July 4, 2025) made several family credits permanent and larger, added a refundable piece to the adoption credit, and rewrote the child and dependent care credit for 2026. At the same time, it ended nearly every clean energy and electric vehicle credit, the enhanced health insurance subsidies lapsed on January 1, 2026, and the Work Opportunity Tax Credit went into hiatus. If you are working from a checklist written before mid-2025, some of it is now wrong.

This guide walks through what is actually available for the 2025 return you filed (or are still amending) in 2026, and for the 2026 return you will file in 2027. Every dollar figure, form number, and deadline below has been checked against IRS revenue procedures, form instructions, and current guidance rather than written from memory.

Tax Credit Basics

What Is a Federal Tax Credit?

A tax credit is a direct, dollar-for-dollar reduction of the income tax you owe. Congress creates credits to encourage specific behavior — working, raising children, going to school, saving for retirement, buying health coverage, hiring from disadvantaged groups — or simply to deliver relief to households at certain income levels.

The mechanics are simple. Figure your tax the normal way. Then subtract the credits you qualify for. If you owe $4,300 in federal income tax and you qualify for $2,200 of child tax credit, your bill drops to $2,100. Nothing else on the return has that kind of leverage.

How Is a Credit Different From a Deduction?

This is the single most misunderstood point in personal tax, and the difference is worth real money. A deduction reduces the income that gets taxed. A credit reduces the tax itself.

Say you are in the 22% bracket. A $1,000 deduction saves you $220 — the deduction is worth your marginal rate. A $1,000 credit saves you $1,000. The credit is worth roughly four and a half times more in that example, and the gap widens the lower your bracket is.

That is also why credits are politically expensive and therefore heavily conditioned. Deductions tend to be broad; credits tend to come with income phase-outs, identification-number requirements, filing-status restrictions, and their own form.

Refundable, Nonrefundable, and Partially Refundable — Why the Label Matters

Two credits of the same size can produce wildly different outcomes depending on this classification.

• Nonrefundable credits can reduce your tax to zero but no further. If your tax before credits is $600 and you qualify for a $1,000 nonrefundable credit, you use $600 of it and the rest is generally lost. The Lifetime Learning Credit, the Saver’s Credit, and the child and dependent care credit all work this way.
• Refundable credits pay out even if you owe nothing. If your tax is zero and you qualify for a $4,328 Earned Income Tax Credit, the IRS sends you $4,328. The EITC and the Premium Tax Credit are the two biggest examples.
• Partially refundable credits split the difference. The Child Tax Credit is worth up to $2,200 per child for 2025 and 2026, of which up to $1,700 can come back as a refund. The American Opportunity Tax Credit is worth up to $2,500, of which up to 40% — $1,000 — is refundable. The adoption credit became partially refundable for the first time in 2025.

One practical consequence: a household with very little tax liability may get almost nothing from a large nonrefundable credit. That is exactly why Congress is replacing the nonrefundable Saver’s Credit with a direct government contribution starting in 2027 — the old credit was worthless to the low earners it was designed for.

Do Credits Come Off Before or After Other Credits?

Order matters more than most people expect. Nonrefundable credits are applied against your tax liability in a set sequence, and a credit that appears earlier in that sequence can consume the liability that a later credit needed. This is why two families with identical incomes and identical children can end up with different refunds — one of them had a foreign tax credit or an adoption carryforward absorbing the liability first. If you are stacking three or more credits, the sequencing is worth modeling before you file, not after.

What Changed: The 2025–2026 Credit Landscape

More changed in an 18-month span than in the previous decade. Here is the short version before we go credit by credit.

Made Permanent and Increased

• Child Tax Credit — raised to $2,200 per qualifying child, with up to $1,700 refundable, and made permanent with future inflation indexing.
• Adoption Credit — up to $5,000 per child became refundable beginning with the 2025 tax year, the first time in the credit’s history.
• Child and Dependent Care Credit — the top rate jumps from 35% to 50% starting in 2026, with a far more generous income phase-down.
• Employer-Provided Childcare Credit — the cap leaps from $150,000 to $500,000 ($600,000 for eligible small businesses) for tax years after 2025.
• Employer Credit for Paid Family and Medical Leave — made permanent, with a new insurance-premium calculation method and a shorter employee service requirement.

Ended or Lapsed

• New and used clean vehicle credits and the commercial clean vehicle credit — gone for vehicles acquired after September 30, 2025.
• Residential Clean Energy Credit (solar, batteries, geothermal) — gone for expenditures made after December 31, 2025.
• Energy Efficient Home Improvement Credit (heat pumps, windows, insulation, energy audits) — gone for property placed in service after December 31, 2025.
• Enhanced Premium Tax Credit — the pandemic-era enhancement expired December 31, 2025, restoring the 400%-of-poverty income cliff for 2026 coverage.
• Work Opportunity Tax Credit — authorization lapsed for employees who begin work after December 31, 2025.

Coming Next

• Saver’s Match replaces the Saver’s Credit for retirement contributions beginning with the 2027 tax year — a direct federal deposit into your retirement account instead of a credit on your return.
• A new nonrefundable credit of up to $1,700 for contributions to qualified elementary and secondary scholarship granting organizations, beginning January 1, 2027, with a five-year carryforward.

Credits for Families and Dependents

Child Tax Credit (CTC) and Additional Child Tax Credit

The Child Tax Credit is the largest credit most middle-income households will ever claim. For tax years beginning in 2025 and 2026, the maximum credit is $2,200 per qualifying child, and the refundable portion — the Additional Child Tax Credit — is capped at $1,700 per qualifying child. Both amounts are now permanent and indexed for inflation going forward.

A qualifying child is generally one who has not turned 17 during the tax year, is your son, daughter, stepchild, foster child, sibling, or a descendant of any of them, lived with you more than half the year, did not provide more than half of their own support, and is claimed as your dependent.

The identification rules tightened. To claim either the refundable or the nonrefundable portion, the return must include a valid Social Security number for each qualifying child, and the taxpayer must have an SSN as well — on a joint return, at least one spouse must have one. Missing or late-issued numbers are one of the most common reasons a credit gets stripped from a return after filing.

The credit phases out once modified adjusted gross income exceeds $200,000 ($400,000 for joint filers), reduced by $50 for each $1,000 or fraction of a dollar over the threshold. Those phase-out figures were also made permanent and are not indexed.

You claim the credit on Schedule 8812 (Form 1040), Credits for Qualifying Children and Other Dependents.

Credit for Other Dependents (ODC)

Dependents who do not qualify for the Child Tax Credit may still generate a $500 nonrefundable credit — a 17- or 18-year-old, a college student you support, an elderly parent, or a dependent with an ITIN rather than an SSN. It uses the same $200,000 / $400,000 phase-out and the same Schedule 8812. You cannot claim both the CTC and the ODC for the same person.

Child and Dependent Care Credit — Substantially Better Starting in 2026

This credit offsets what you pay for care of a child under 13, or a spouse or dependent of any age who cannot care for themselves, so that you (and your spouse, if married) can work or look for work. Qualifying expenses remain capped at $3,000 for one qualifying person and $6,000 for two or more.

What changed is the percentage applied to those expenses. For 2025, the credit tops out at 35% and slides down to 20% quickly. For tax years beginning in 2026, the top rate rises to 50%, and the phase-down is rewritten in two stages:

• The 50% rate applies at adjusted gross income up to $15,000, then drops one percentage point for each $2,000 (or fraction) of AGI above $15,000 — but not below 35%.
• Above $75,000 of AGI ($150,000 on a joint return), the rate drops another point for each $2,000 ($4,000 joint) of AGI — but not below 20%.

In practice, the rate reaches its 35% floor once AGI passes $43,000, and reaches the 20% floor above roughly $103,000 for single filers or $206,000 for joint filers. That means a maximum credit for 2026 of $1,500 for one qualifying person and $3,000 for two or more, and — importantly — a meaningful credit is now available far higher up the income scale than before.

A related change: the dependent care assistance program (dependent care FSA) exclusion rose from $5,000 to $7,500 ($3,750 married filing separately) for 2026. You cannot use the same dollars twice — expenses reimbursed through an FSA reduce the expenses eligible for the credit, so the two need to be coordinated, not stacked. For many two-earner households the right split between the FSA and the credit is now a genuine planning question rather than an automatic answer.

Claim it on Form 2441. You must report the care provider’s name, address, and taxpayer identification number, which is why informal cash arrangements so often cost families the credit.

Adoption Credit — Now Partially Refundable

For adoptions finalized in 2025, the maximum credit is $17,280 per eligible child, and for the first time up to $5,000 per child is refundable. The nonrefundable balance can be carried forward up to five years. The credit begins to phase out at modified AGI above $259,190 and disappears entirely at $299,190.

For 2026, the maximum rises to $17,670 per child, with up to $5,120 refundable, phasing out between $265,080 and $305,080 of modified AGI.

Two details that matter in practice. First, the refundable portion is determined separately for each eligible child, and a nonrefundable amount carried forward from an earlier year cannot be converted into a refundable amount later. Second, Indian tribal governments now have the same authority as state governments to determine that a child has special needs for purposes of the credit.

An employer adoption assistance program can exclude the same maximum from your income — $17,280 for 2025, $17,670 for 2026 — but you cannot claim both the exclusion and the credit for the same expenses. Everything is computed on Form 8839.

The Earned Income Tax Credit: The Most Valuable Credit Most People Miss

The EITC is a fully refundable credit for people who work and earn modest incomes. It is the largest anti-poverty provision in the Internal Revenue Code, and the IRS has estimated for years that roughly one in five eligible taxpayers never claims it. If your income dropped, you started self-employment, you had a child, or your filing status changed, you may qualify in a year you did not before.

2025 Amounts (The Return Filed in 2026)

Maximum credit by family size, and the earned income and AGI ceilings that apply:

Investment income — interest, dividends, capital gains, rents, and royalties — must not exceed $11,950 for 2025. Exceed it by a dollar and the entire credit is gone regardless of how low your wages were.

2026 Amounts (The Return You Will File in 2027)

For 2026 the investment income ceiling rises to $12,200. The credit begins to phase out at $23,890 of income for most filers and $31,160 for joint filers with children ($10,860 and $18,140 respectively with no children).

Who Qualifies

• You must have earned income — wages, salary, tips, or net self-employment earnings. Unemployment compensation, Social Security, pensions, and investment income do not count as earned income.
• You, your spouse, and every qualifying child listed must have a valid Social Security number.
• You must be a U.S. citizen or resident alien all year.
• Married filing separately is generally disqualifying, with a narrow exception for a separated spouse who lived apart from the other spouse for the last six months of the year or is legally separated, and who lived with a qualifying child for more than half the year.
• With no qualifying children, you must be at least 25 and under 65.
• You cannot be claimed as a qualifying child of another taxpayer.

Why Your EITC Refund Arrives Later Than Everyone Else’s

By law, the IRS cannot release a refund on a return claiming the EITC or the Additional Child Tax Credit before mid-February, even if the return was filed and accepted in January. This is an anti-fraud measure, not a problem with your return. Plan cash flow around late February rather than late January.

If the IRS Has Denied Your EITC Before

A prior disallowance carries consequences that surprise people. If your EITC was reduced or denied for any reason other than a math or clerical error, you generally must file Form 8862 to claim it again. If the denial was due to reckless or intentional disregard of the rules, you are barred for two years. If it was due to fraud, the ban is ten years. The same structure applies to the Child Tax Credit and the American Opportunity Tax Credit.

This is one of the areas where a self-prepared correction can make things worse. Filing an amended return that repeats a disallowed position — rather than addressing the specific defect the IRS identified — often converts a fixable problem into a ban.

Education Credits

Two education credits exist, they cannot both be claimed for the same student in the same year, and choosing between them is often worth several hundred dollars.

American Opportunity Tax Credit (AOTC)

The AOTC is worth up to $2,500 per eligible student per year: 100% of the first $2,000 of qualified expenses plus 25% of the next $2,000. Up to 40% — a maximum of $1,000 — is refundable, so it can produce a refund even for a family with no tax liability.

• Available only for the first four tax years of post-secondary education for each student.
• The student must be pursuing a degree or recognized credential and enrolled at least half-time for at least one academic period during the year.
• The student must not have a felony drug conviction as of the end of the tax year.
• Qualified expenses include tuition, required fees, and course materials — books, supplies, and equipment — even if bought outside the school.
• The credit phases out between $80,000 and $90,000 of modified AGI ($160,000 to $180,000 on a joint return) and is unavailable to married taxpayers filing separately.
• The refundable portion is denied to a student who is subject to the kiddie tax rules — generally a full-time student under 24 whose earned income does not exceed half of their support.

You will need Form 1098-T from the institution and you claim the credit on Form 8863. Note that the 1098-T reports what the school billed or received, which is frequently not the same as your adjusted qualified expenses once scholarships, grants, and 529 distributions are allocated. Reconciling those numbers correctly is where most of the money is won or lost.

Lifetime Learning Credit (LLC)

The LLC is worth up to $2,000 per tax return — 20% of up to $10,000 of qualified expenses — and it is far more flexible than the AOTC:

• No limit on the number of years you can claim it.
• Available for graduate school, professional programs, and single courses taken to acquire or improve job skills.
• No degree program requirement and no half-time enrollment requirement.

The trade-offs: it is entirely nonrefundable, it is capped per return rather than per student, and course materials generally qualify only if they must be paid to the institution as a condition of enrollment.

The income limits are the same figures as the AOTC — a phase-out between $80,000 and $90,000 of modified AGI, or $160,000 to $180,000 on a joint return — but these amounts have not been adjusted for inflation for any tax year beginning after December 31, 2020, so they will keep tightening in real terms every year.

Choosing Between Them

For an undergraduate in one of the first four years with at least $4,000 of qualified expenses, the AOTC almost always wins: more credit, and part of it is refundable. The LLC becomes the better answer for graduate students, for a fifth undergraduate year, for part-time students, for certificate and licensing coursework, and for anyone whose expenses are large but who has already used the AOTC four times.

With more than one student in the household you can mix them — AOTC for the undergraduate, LLC for the parent finishing a master’s — on the same Form 8863.

Related Education Changes Worth Knowing

The One, Big, Beautiful Bill Act expanded what 529 plan money can pay for, effective for distributions made after July 4, 2025. Qualified higher education expenses now include postsecondary credentialing expenses — tuition, books, supplies, and equipment required for a credential, plus continuing education and exam fees to keep a credential current. The K–12 categories were broadened as well, to cover curriculum and curriculum materials, online educational materials, tutoring and educational classes outside the home, college admission testing fees, dual-enrollment fees, and educational therapies.

Separately, the student loan interest deduction (a deduction, not a credit — worth up to $2,500) phases out between $85,000 and $100,000 of modified AGI for 2025, or $170,000 to $200,000 on a joint return. For 2026 the joint range widens to $175,000 to $205,000.

Retirement Savings: The Saver’s Credit and What Replaces It

Saver’s Credit (Retirement Savings Contributions Credit) — 2026 Is the Last Year

The Saver’s Credit is a nonrefundable credit worth 50%, 20%, or 10% of up to $2,000 of retirement contributions per person ($4,000 for a married couple filing jointly). The maximum is $1,000 per person, or $2,000 for a couple both at the 50% rate.

For 2025, any credit is gone above adjusted gross income of $79,000 (joint), $59,250 (head of household), or $39,500 (single, married filing separately, or qualifying surviving spouse). For 2026, those ceilings rise to $80,500, $60,375, and $40,250. The 2026 rate bands are:

These are cliffs, not gradual phase-outs. One extra dollar of AGI can take a couple from a $1,000 credit to a $400 credit. Deductible contributions, health savings account contributions, and the timing of a Roth conversion all move AGI and can be used deliberately to stay under a breakpoint.

To qualify you must be at least 18, not a full-time student, and not claimed as a dependent on someone else’s return. Eligible contributions include traditional and Roth IRAs, elective deferrals to a 401(k), 403(b), governmental 457(b), SEP, SIMPLE, or the federal Thrift Savings Plan, voluntary after-tax contributions to a qualified plan, and ABLE account contributions by the designated beneficiary. Rollovers and employer matching contributions do not count.

One trap catches people every year: distributions taken during a testing period — the tax year, the two preceding years, and the period after year end through the return’s due date including extensions — reduce your eligible contributions dollar for dollar and can wipe out the credit entirely. Claim it on Form 8880.

The Saver’s Match Arrives in 2027

Section 103 of the SECURE 2.0 Act replaces the Saver’s Credit for retirement contributions with the Saver’s Match for tax years beginning after December 31, 2026. Instead of a credit on your return, the federal government deposits 50% of the first $2,000 of qualified retirement contributions — up to $1,000 per person — directly into your retirement account. Spouses qualify separately. The first matches will be paid in 2028 based on 2027 contributions.

The structural improvement is that the Match is not limited by your tax liability. A worker who owes no federal income tax — precisely the person the old credit was written for and never reached — now receives the full benefit. Treasury and the IRS issued Notice 2026-48 in August 2026 describing the anticipated rules, with proposed regulations to follow.

Two things to do during 2026 if this affects you: confirm that your IRA custodian or workplace plan will accept Saver’s Match deposits, because the money has to land somewhere; and remember that the same testing-period recapture concept carries over, so withdrawals can reduce future match amounts.

The Saver’s Credit itself does not vanish entirely. Public Law 119-21 made it permanent for contributions a designated beneficiary makes to their own ABLE account, and raised the maximum qualifying ABLE contribution to $2,100 from 2027 onward.

Health Coverage: The Premium Tax Credit After the Enhancement Expired

The Premium Tax Credit helps pay for a qualified health plan bought through the Health Insurance Marketplace. It is refundable, and most people take it in advance as the Advance Premium Tax Credit (APTC) paid directly to the insurer each month to lower the premium.

What Changed on January 1, 2026

The American Rescue Plan Act temporarily removed the income ceiling for eligibility and lowered the share of income households had to contribute toward premiums. The Inflation Reduction Act extended that enhancement through the end of 2025. It expired on December 31, 2025, and Congress has not restored it. 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 passed that bill or an alternative.

The practical consequences for 2026 coverage:

• The 400%-of-federal-poverty-line cliff is back. Household income above 400% of the poverty line for your family size means no Premium Tax Credit at all — not a reduced one.
• The applicable percentages reverted to higher pre-2021 levels, so households that still qualify contribute a larger share of income and receive a smaller subsidy.
• Lower-income households that had been getting fully subsidized benchmark coverage generally no longer do.

The base credit itself did not expire and has no sunset date. What lapsed was the temporary enhancement layered on top of it.

The Repayment Change Nobody Talks About

This one deserves attention. Historically, if the advance payments you received exceeded the credit you actually earned — usually because your income came in higher than the estimate you gave the Marketplace — the amount you had to repay was capped at a set dollar figure for households under 400% of the poverty line. Section 71305 of the One, Big, Beautiful Bill Act removed that repayment limitation effective for tax years beginning after December 31, 2025.

For 2026 and forward, excess advance payments must be repaid in full. A mid-year raise, a bonus, a strong self-employment quarter, or a spouse returning to work can now produce a four- or five-figure repayment on the return. If your income is variable, updating your Marketplace income estimate during the year is no longer a housekeeping task — it is the difference between a normal return and a surprise balance due.

How to Claim and Reconcile It

You reconcile the credit on Form 8962, using Form 1095-A from the Marketplace. You generally cannot claim the credit if you file married filing separately, with narrow exceptions for victims of domestic abuse and spousal abandonment. If you received APTC and simply do not file, the Marketplace can cut off your advance payments for the following year — one of the more painful consequences of an unfiled return.

Energy and Vehicle Credits: What Ended and When

This is where the most outdated advice is circulating. The Inflation Reduction Act credits were scheduled to run into the 2030s. The One, Big, Beautiful Bill Act cut them short. If a website, a salesperson, or an older article tells you about a solar credit or an EV credit available today, check the date.

Two timing rules cause most of the disputes. For the Energy Efficient Home Improvement Credit, what matters is when the property was placed in service. For the Residential Clean Energy Credit, what matters is when the expenditure was made — and the Code defines that as the date the original installation of the item is completed. A solar system paid for with a deposit in November 2025 but not switched on until February 2026 does not qualify. That is not an interpretation; it is the statutory rule the IRS confirmed in its own guidance on the termination provisions.

If you did qualify in 2025, you still claim these on Form 5695 with your 2025 return, and the carryforward rules for unused Residential Clean Energy Credit were not changed — an unused amount can still carry forward to future years even though no new expenditures qualify.

Business and Employer Tax Credits

Most business credits are components of the General Business Credit, computed on Form 3800. Each component has its own form, and the general business credit as a whole is subject to limitations based on your tax liability, with a one-year carryback and a twenty-year carryforward for most components. Business owners routinely leave these unclaimed because they are calculated on forms nobody opens unless they know to look.

Small Business Health Care Tax Credit

Worth up to 50% of the premiums you pay for employee health coverage (35% for tax-exempt employers). For tax years beginning in 2025, you qualify if you:

• Have fewer than 25 full-time equivalent employees — and part-timers combine, so 48 half-time employees is 24 FTEs and still qualifies;
• Pay average annual wages of less than $67,000 per FTE (the figure the reduction begins at is $33,300 for 2025, rising to $34,100 for 2026);
• Pay at least 50% of the premium cost for each enrolled employee under a qualifying arrangement; and
• Buy the coverage through a Small Business Health Options Program (SHOP) Marketplace (with a narrow exception for counties with no SHOP plans available, and no credit at all for Hawaii employers for plan years after 2016).

Two reductions apply separately — one for having more than 10 FTEs and one for average wages above $33,300 — and together they can reduce the credit to zero even for an employer that clears both outer limits. Owners, partners, more-than-2% S corporation shareholders, and their family members are excluded from the employee count and from the premium calculation.

The credit is available for only a two-consecutive-year credit period, so the year you start claiming it is itself a planning decision. Compute it on Form 8941.

Work Opportunity Tax Credit — Currently in Hiatus

The WOTC rewards employers for hiring from targeted groups including qualified veterans, ex-felons, SNAP recipients, long-term unemployment recipients, designated community residents, and vocational rehabilitation referrals. The credit generally runs up to $2,400 per qualifying employee, and considerably higher for certain veteran categories.

Authorization lapsed for employees who begin work after December 31, 2025. Wages paid on or before that date remain creditable, including carryforwards. State workforce agencies were directed not to issue certifications during the lapse.

History matters here. The WOTC has lapsed repeatedly since 1996 and has been reinstated retroactively each time, because extending the ending date in the statute automatically covers the gap. The employers who captured those retroactive credits were the ones who kept screening. Keep submitting Form 8850 to your state workforce agency within 28 days of each eligible worker’s start date even while no determinations are being issued. If reauthorization comes with retroactivity, unfiled paperwork cannot be recreated after the fact.

Employer-Provided Childcare Credit

For tax years beginning in 2025, this credit covers 25% of qualified childcare facility expenditures plus 10% of resource and referral expenditures, capped at $150,000 per year. Starting in 2026 the credit rate rises to 40% with a cap of $500,000, and an eligible small business — one meeting a $25 million average gross receipts test — gets 50% with a cap of $600,000. Both caps are indexed after 2026.

The change moves this from a rounding error to a genuine benefit, and it applies to contracting with a qualified childcare facility, not only to building one. Claim it on Form 8882. Employers who already offer a childcare benefit should also look at whether prior open years can be amended under the older, smaller rules.

Employer Credit for Paid Family and Medical Leave — Now Permanent

Section 45S gives employers a credit of 12.5% to 25% of wages paid to qualifying employees on family and medical leave, for up to 12 weeks, scaled to how much of normal wages the policy replaces. It began as a two-year pilot in 2017 and was extended in fragments through 2025. It is now permanent, with changes first effective for tax years beginning in 2026:

• Employers may elect to count employees after six months of service instead of a full year.
• A new premium method lets an employer compute the credit from insurance premiums paid for family and medical leave coverage rather than from wages actually paid during leave.
• The credit is now available in states with mandatory paid leave programs for benefits paid above and beyond the state benefit — previously those employers were shut out entirely.

The written policy requirements are strict: at least two weeks of annual paid leave for full-time qualifying employees (prorated for part-time), payment of at least 50% of normal wages, and specific non-interference language. The IRS issued Notice 2026-28 in August 2026 explaining how the premium method works. Employers who want the 2026 credit need their written policy compliant for the full year, so policy amendments are time-sensitive. File Form 8994.

Retirement Plan Credits for Small Employers

If you have 100 or fewer employees who received at least $5,000 of compensation in the preceding year, starting a plan is heavily subsidized:

• Startup cost credit (§45E): 100% of qualified startup costs for employers with 1–50 employees, or 50% for 51–100 employees, capped at $5,000 per year for the first three years.
• Employer contribution credit (§45E): up to $1,000 per employee for employees earning under $100,000, available for the first five plan years on a declining percentage.
• Auto-enrollment credit (§45T): $500 per year for three years for including an eligible automatic contribution arrangement.
• Military spouse participation credit (§45AA): for eligible small employers whose defined contribution plans include specific military-spouse-friendly features.

All four are computed on Form 8881 and flow to Form 3800. Between the startup credit, the auto-enrollment credit, and the contribution credit, a small employer can frequently cover most of the true cost of launching a plan in the first three years.

Research and Development Credit

The §41 credit is not just for laboratories. Software development, process engineering, formulation work, and product design routinely qualify. The provision that matters most for young companies is the payroll tax election: a qualified small business can elect to apply up to $500,000 of its research credit against the employer portion of payroll taxes rather than income tax — turning the credit into cash for a company that has no income tax liability yet. Compute it on Form 6765.

Related and significant: the One, Big, Beautiful Bill Act restored immediate expensing for domestic research and experimental expenditures, reversing the mandatory capitalization that had inflated taxable income for many small technology and engineering firms since 2022.

Other Business Credits Worth Checking

• Disabled Access Credit (§44, Form 8826) — 50% of eligible access expenditures between $250 and $10,250 for small businesses, a maximum credit of $5,000 per year.
• Credit for Employer Social Security Taxes Paid on Tips (§45B, Form 8846) — 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.
• Low-Income Housing Credit (§42, Form 8586) — the One, Big, Beautiful Bill Act increased the state housing credit ceiling and eased the bond-financing threshold, expanding the pipeline of qualifying projects.
• Empowerment zone, Indian employment, and various fuel and energy production credits — narrower, but valuable where they apply.

New Credits and Accounts on the Horizon

Scholarship Granting Organization Credit (2027)

Beginning January 1, 2027, individuals may claim a nonrefundable credit of up to $1,700 for cash contributions to a qualified elementary and secondary education scholarship granting organization — a 501(c)(3) that is not a private foundation. Unused amounts carry forward for five years. This is a new provision of the One, Big, Beautiful Bill Act and it will interact with state charitable-credit programs, so it will need careful handling in the first filing season.

Trump Accounts

The Act also created a new category of tax-favored savings accounts for children, with a federal seed contribution available for children born in 2025 through 2028. These are savings accounts rather than a credit on your return, but they belong on the same planning checklist because eligibility and the contribution mechanics run through the tax system.

Saver’s Match (2027)

Covered above in the retirement section, but worth repeating in a planning context: from tax year 2027, low- and moderate-income savers receive a federal deposit rather than a credit, and it reaches people who owe no tax at all. If you have working adult children or employees in that income range, 2026 is the year to make sure they have an eligible account open and designated.

Credits vs. the New OBBBA Deductions

A great deal of 2025 and 2026 tax coverage blurs the line between the new deductions and credits. They are not the same thing, and confusing them leads to overestimating your refund. The following are deductions — they reduce taxable income, not tax — and they are temporary, generally applying to tax years 2025 through 2028:

• Qualified tips: up to $25,000 deductible, for occupations the IRS lists as customarily and regularly receiving tips. Phases out above $150,000 of modified AGI ($300,000 joint).
• Qualified overtime: up to $12,500 ($25,000 joint), limited to the premium portion required by the Fair Labor Standards Act — the “half” in time-and-a-half, not the whole overtime paycheck. Same phase-out thresholds.
• Car loan interest: up to $10,000 of interest on a loan for a personal-use vehicle whose final assembly occurred in the United States. Phases out above $100,000 of modified AGI ($200,000 joint).
• Enhanced senior deduction: an additional $6,000 per qualifying individual age 65 or older.

All four are available whether you itemize or claim the standard deduction, they require a valid Social Security number, and married taxpayers must file jointly to claim the tips and overtime deductions. The IRS created Schedule 1-A for the 2025 tax year to report them, announced in March 2026.

For context on how the deductions and credits interact: the standard deduction for 2025 is $15,750 single, $23,625 head of household, and $31,500 married filing jointly, rising for 2026 to $16,100, $24,150, and $32,200. Deductions get you to taxable income. Credits then come off the tax. The credits are where the leverage is.

State Tax Credits, With a Focus on California

States run their own credits, and they are not federal credits — a common confusion. Some mirror federal provisions, some are unique, and a few are refundable when the federal analogue is not. California is a useful example because its refundable credits are unusually generous at the bottom of the income scale and because ITIN holders qualify for the state credits even where they cannot claim the federal EITC.

California Earned Income Tax Credit (CalEITC)

For tax year 2025, CalEITC is worth up to $3,756 for workers with earned income of at least $1 and no more than $32,900. It is refundable, ITIN filers qualify, and you claim it on FTB Form 3514. It can generally be claimed retroactively for up to four prior years by filing or amending a California return.

Young Child Tax Credit (YCTC)

If you qualify for CalEITC and had a child under age 6 at the end of the year, you may claim up to $1,189 for 2025, refundable. For 2025 you can qualify even with zero earned income, provided your total wages do not exceed $35,640 and your total net loss does not exceed $35,640, and you otherwise meet the CalEITC and YCTC requirements.

Foster Youth Tax Credit (FYTC)

Current and former foster youth who were ages 18 through 25 at the end of the year, who were in California foster care at age 13 or older, and who qualify for CalEITC, may claim up to $1,189 for 2025 — or up to $2,378 where both the taxpayer and spouse or registered domestic partner qualify. Foster status must be verified, either by consenting on the FTB 3514 to a database check or by supplying a verification letter.

Nonrefundable Renter’s Credit

If you paid rent on your California principal residence for at least half the year on property that was not tax exempt, the credit is $60 (single or married/RDP filing separately) or $120 (married/RDP filing jointly, head of household, or qualifying surviving spouse). For 2025 your California income must be $53,994 or less, or $107,987 or less for the higher filing statuses. You cannot have lived with someone who can claim you as a dependent, and neither you nor your spouse can have received a property tax exemption.

Legislation enacted in 2025 would raise the renter’s 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 — so treat any larger figure as contingent until it is appropriated.

Other California Credits to Check

• 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, and easy to substantiate.
• College Access Tax Credit — for contributions to the California College Access Tax Credit Fund.

If you live outside California, the same principle applies: check your state’s earned income credit, child care credit, renter or property tax credit, and any state-level education or energy incentives. Roughly thirty states plus the District of Columbia have some form of state earned income credit, usually calculated as a percentage of the federal EITC — which means a federal EITC error propagates straight into your state return.

Which Forms Do You Actually Need?

Almost every credit rides on its own form and then flows to Form 1040 or Form 1040-SR through Schedule 3 or Schedule 8812. (One clarification, since this trips people up: Form 1040-SR is the U.S. Tax Return for Seniors — it is a single form with larger type, not a separate return you file alongside Form 1040.)

The Credits That Draw IRS Scrutiny

Refundable credits are where the money leaves the Treasury, so they are where enforcement concentrates. Claiming a credit you are entitled to is not risky. Claiming one on shaky documentation is a different matter, and a surprising number of taxpayers are pulled into examination through no fault of their own — because a preparer was aggressive, or because a promoter filed for them.

EITC and Child Tax Credit Examinations

These are usually correspondence audits. The IRS sends a notice (frequently a CP75 or CP75A) freezing the refund and asking you to prove residency, relationship, and support for each child — school records, medical records, a landlord letter, benefit statements. Respond fully and on time and the credit is usually restored. Ignore it and the credit is disallowed, Form 8862 becomes mandatory going forward, and in the worst case a two- or ten-year ban attaches.

Paid preparers face their own penalty — $665 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 uncomfortable questions about who lived where and for how long. It is not distrust; it is a statutory obligation.

The Employee Retention Credit Reckoning

The ERC generated an entire industry of promoters who filed claims for businesses that never qualified. The cleanup is now written into law:

• 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 otherwise met every eligibility requirement.
• The assessment period for those quarters was extended to six years, so exposure runs well past the ordinary statute.
• The 20% penalty for an excessive refund claim under section 6676 was extended from income tax to employment tax, which brings ERC claims squarely within its reach.
• Additional penalties apply to ERC promoters who failed due diligence requirements.

If your claim was filed after January 31, 2024 but was actually refunded before July 4, 2025, the IRS has said the new limitation does not force repayment — though other compliance activity can still result in an adjustment. If you received Letter 105-C, Claim Disallowed, you have appeal rights with the IRS Independent Office of Appeals, and a two-year window to resolve the claim or file a refund suit. That window does not pause while an appeal is pending, which is a trap worth knowing about before it closes.

Promoted Credit Schemes

Two recurring scams put ordinary taxpayers at risk of frivolous return penalties: the fuel tax credit (Form 4136), which is meant for off-highway business and farming use and almost never applies to an individual; and the credits for sick and family leave (Form 7202), which applied only to certain self-employed taxpayers for 2020 and 2021 and are frequently claimed years later by people who never qualified. Social media promotes both aggressively. If someone offers to get you a large refund based on a credit you have never heard of, the exposure lands on you, not on them.

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

There is a defined process, and the outcome usually depends on how the first response is handled.

1. Read the notice and find the deadline. A CP75 asking for documentation, a CP2000 proposing an adjustment, a Letter 105-C disallowing a claim, and a math error notice all have different response windows and different appeal rights. The deadline printed on the notice governs.
2. Do not simply refile. Sending in the same numbers again without addressing the specific defect the IRS identified is the most common mistake, and with the EITC and the Child Tax Credit it can trigger a multi-year ban.
3. Build the documentation the statute actually requires. Residency, relationship, support, enrollment, payment, provider identification — each credit has its own proof requirements, and generic bank statements rarely satisfy them.
4. Preserve appeal rights. If the examiner will not budge, the IRS Independent Office of Appeals is a separate function with authority to settle on the hazards of litigation. A math error notice has its own 60-day window to request abatement before assessment becomes final.
5. Watch the refund statute. To claim a refund you generally have three years from the date the return was filed or two years from the date the tax was paid, whichever is later. A credit you never claimed is only recoverable inside that window.

How Far Back Can You Go to Claim a Credit You Missed?

Generally three years. That means in 2026 you can still amend 2022, 2023, and 2024 returns — using Form 1040-X — to claim credits you were entitled to and did not take. Missed EITC, an unclaimed education credit, an adoption credit nobody told you about, a small business health care credit your prior preparer skipped: all are recoverable if the window is still open. In California, CalEITC can generally be claimed for up to four prior years.

This is one of the most reliable sources of found money in the entire tax code, and it is available to anyone willing to have their prior three years reviewed.

Myths and Outdated Advice Still Circulating

• “There is a 25% solar credit that runs through 2024.” The Residential Clean Energy Credit was 30%, not 25%, and it ended for expenditures made after December 31, 2025.
• “You can get $7,000 for an electric vehicle.” The New Clean Vehicle Credit was up to $7,500, and it ended for vehicles acquired after September 30, 2025.
• “The EITC investment income limit is $10,000.” It is $11,950 for 2025 and $12,200 for 2026, and it is a hard cliff.
• “The Saver’s Credit gives you up to $1,000.” It gives you 50%, 20%, or 10% of up to $2,000 of contributions — so most claimants receive far less than $1,000, and the average claimed has historically been under $200 because the credit is nonrefundable.
• “The small business health care credit cuts off at $50,000 of average wages.” The $50,000 figure in the statute is indexed; for 2025 the actual ceiling is average annual wages under $67,000, with reductions starting at $33,300.
• “Tax credits and deductions are basically the same.” A $1,000 credit is worth $1,000. A $1,000 deduction is worth your marginal rate — often $120 to $240.
• “I don’t need to file, so there is nothing to claim.” Refundable credits require a filed return. Not filing is the single most common way people forfeit the EITC, the Premium Tax Credit, and refundable state credits.

The Most Expensive Filing Errors We See

• A qualifying child’s Social Security number issued after the return’s due date, disqualifying the Child Tax Credit entirely.
• Claiming both an education credit and a tax-free 529 distribution against the same expenses.
• Failing to reconcile advance Premium Tax Credit on Form 8962, which stops the refund cold.
• Missing the care provider’s taxpayer identification number on Form 2441.
• Married filing separately, which silently disqualifies the EITC, the education credits, and generally the Premium Tax Credit.
• For businesses: never opening Form 3800, and therefore never discovering the components that would have applied.

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.

Tax credits sit at the intersection of two things Mike does every day: getting the return right the first time, and defending it when the IRS challenges it. That combination matters more with credits than with almost any other area of the return, because the enforcement rate is high and the consequences of a mishandled response — multi-year bans, disallowed carryforwards, repayment of advance subsidies — 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 year. Mike reviews the last three federal years and, in California, up to four, and quantifies what is recoverable before any work begins.
• Correct treatment of the 2025 and 2026 rule changes. The permanent Child Tax Credit amounts, the refundable adoption credit, the rewritten child and dependent care percentages for 2026, the expired energy and vehicle credits, and the removal of the advance Premium Tax Credit repayment cap all require different handling than prior-year returns.
• Representation in EITC, Child Tax Credit, and education credit examinations. Mike assembles the residency, relationship, and support documentation the IRS actually accepts, responds within the notice deadline, and takes the matter to the Independent Office of Appeals when the examiner is wrong.
• Employee Retention Credit defense. Whether the issue is a Letter 105-C disallowance, an examination inside the extended six-year assessment period, or a promoter-prepared claim you now need to unwind, Mike handles the response and the appeal.
• Business credit identification and computation. Form 3800 components that go unclaimed year after year — small employer health insurance, retirement plan startup and auto-enrollment credits, the paid family and medical leave credit, employer-provided childcare, research credits with the payroll tax offset, disabled access, and the FICA tip credit.
• Work Opportunity Tax Credit continuity during the hiatus. Keeping Form 8850 screening and 28-day submissions running so that retroactive reinstatement, if it comes, is not lost to missing paperwork.
• 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 who does 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 a Credit Review — Talk to Mike Directly

If you have not had your last three years reviewed for missed credits, there is a reasonable chance money is sitting in an amendable return. If the IRS 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 1-877-788-2937, or visit myirstaxrelief.com, to schedule a confidential consultation with Mike Habib, EA. Representation is available in all fifty states and for Americans living abroad.

Sources and Verification

Figures in this guide were verified against primary sources current as of August 2026:

IRS Revenue Procedure 2025-32 (2026 inflation-adjusted amounts, including the child tax credit, earned income credit, adoption credit, and §45R small employer 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, August 2026); IRS Notice 2026-28 (§45S paid family and medical leave premium method, August 2026); IRS Notice 2025-69 and Notice 2025-62 (qualified tips and overtime); IR-2026-28 (Schedule 1-A); IRS Instructions for Forms 8839, 8941, 8881, 8880, 8863, 8962, 2441, and 5695; IRS FAQs on the modification of §§25C, 25D, 25E, 30C, 30D, 45L, 45W and 179D under Public Law 119-21; IRS Fact Sheet 2025-07 (Employee Retention Credit limitations under OBBBA §70605(d)); Public Law 119-21, the One, Big, Beautiful Bill Act, enacted July 4, 2025; Congressional Research Service reports R43729 (Work Opportunity Tax Credit), R48290 (enhanced premium tax credit), IF11159 (Saver’s Credit and Saver’s Match), and IN12611 (Residential Clean Energy Credit termination); and California Franchise Tax Board credit pages for CalEITC, the Young Child Tax Credit, the Foster Youth Tax Credit, and the Nonrefundable Renter’s Credit.

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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