Popular Tax Credits for 2027: How They Work

Tax credits are the gold nuggets of the tax world. Qualifying for one feels better than finding $100 in your pants pocket. Here’s a brief look at how they work and an overview of the most common ones you may qualify for.

What is a tax credit?

A tax credit is a dollar-for-dollar reduction of a taxpayer's bill. This can reduce taxes owed or, in some cases, increase a refund.

Tax credits are offered on both the federal and state levels to incentivize certain actions or to offset the cost of certain expenses (e.g., raising or adopting a child). To qualify, taxpayers usually must meet strict criteria for that credit. Good tax software should walk you through which ones you may qualify for and how to claim them.

A tax credit differs from a tax deduction. Deductions lower your taxable income, whereas tax credits lower how much you owe in taxes.

» Dive deeper: Tax deductions vs. tax credits

How do tax credits work?

Tax credits come in three categories: refundable, partially refundable and nonrefundable. These classifications tell you how the credit applies to the taxes you owe. Most tax credits are nonrefundable. Here's a breakdown of each type.

Refundable tax credit

Refundable tax credits are highly sought-after tax benefits. And that's because claiming one can not only reduce your taxes owed but also result in a refund. If you owe less in taxes than the credit amount, the overage will be returned to you as a refund after you file your tax return. For example, if you owe $500 and qualify for a $700 refundable credit, the IRS will refund the extra $200.

Partially refundable tax credit

Partially refundable credits can lower your tax liability by the corresponding credit amount, and if your tax bill is lower than the credit amount, you may be able to get a partial refund for any remaining overage — but only up to a certain amount. For example, if the credit is worth $1,000, but only $500 of that is refundable, you may either have your tax liability lowered by $1,000 or get up to $500 back as a refund if taxes owed are less than the credit amount.

Nonrefundable tax credit

Nonrefundable tax credits reduce your tax liability by the corresponding credit amount. In other words, if you qualify for a $500 nonrefundable credit, your taxes owed are reduced by $500. Once you zero out your taxes owed, though, you won't get any overage of the unused tax credit back as a refund.

Popular tax credits (taxes filed in 2027)

These tax credits apply to tax returns due by April 2027. Keep in mind that the sections below are just summaries. Tax credits have many rules, so consult a tax professional if you're unsure whether you're eligible.

Earned income credit

This earned income tax credit could get you up to $8,231, depending on your tax filing status and how much you made in 2026.

• You don't need to have children to qualify — but generally, the more children you have, the higher your potential credit amount.

• If your AGI was $70,244 or less in 2026, it’s worth looking into. However, if you had more than $12,200 of investment income, dividends, capital gains and a few other things in 2026, you won’t qualify.

Child tax credit

The child tax credit could get you up to $2,200 per kid, with $1,700 being potentially refundable through the additional child tax credit. You may qualify for the full credit only if your modified adjusted gross income was under:

• $400,000 for those married filing jointly and $200,000 for all other filers.

• The higher your income, the less you’ll qualify for.

Child and dependent care credit

Generally, the child and dependent care credit covers up to 50% of up to $3,000 of child care and similar costs for a child under 13, spouse or parent unable to care for themselves, or another dependent so you can work — and up to $6,000 of expenses for two or more dependents.

• The percentage of allowable expenses decreases for higher-income earners — and therefore, the value of the credit also decreases.

• Payments made out of a dependent-care flexible spending account or other tax-advantaged program at work may reduce your credit.

Adoption credit

This covers up to $17,670 in adoption costs per child, with up to $5,120 being refundable.

• The credit begins to phase out at $265,080 of modified adjusted gross income, and people with AGIs of $305,080 and above don’t qualify.

• Also, you can’t take the credit if you’re adopting your spouse’s child

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  Internal Revenue Service. Adoption Credit. Accessed Oct 16, 2023. View all sources .

• People who adopt children with functional needs can get up to the full credit amount, even if their actual expenses were less.

The saver’s credit

The saver's credit runs 10% to 50% of up to $2,000 in contributions to an IRA, a 401(k), a 403(b) or certain other retirement plans ($4,000 if filing jointly).

» Want another way to cut your tax bill? You can reduce your taxable income by contributing to a traditional IRA

American opportunity credit

The American opportunity tax credit runs up to $2,500 per student for tuition, activity fees, books, supplies and equipment during the first four years of college. It is partially refundable, so if the credit lowers your tax bill to $0, you can get up to 40% (limited to $1,000) back as a refund.

• The student must be enrolled at least half-time and can’t have any felony drug convictions.

• Parents or qualified caretakers can take the credit if they qualify and claim the student as a dependent on their return.

Lifetime learning credit

The lifetime learning credit can get up to $2,000 for tuition, activity fees, books, supplies and equipment for undergraduate, graduate or even nondegree courses at accredited institutions.

• Unlike the American opportunity credit, there’s no workload requirement.

• The $2,000 limit is per return, not per student, so the most you can get back is $2,000 regardless of how many students you pay expenses for.

• You can claim both the American opportunity credit and the lifetime learning credit on the same tax return, but you can't claim both for the same student.

» MORE: Popular tax deductions and tax breaks