Tax Credits You Can Use to Reduce Your 2025 Taxes

When it comes to managing your tax bill, it’s important to understand the difference between deductions and tax credits. Both can reduce what you owe, but tax credits often provide greater value. Tax deductions lower your taxable income, which reduces your tax bill based on your marginal tax rate. For example, if you’re in the 22% federal tax bracket and claim a $2,000 charitable deduction, your tax savings would equal $440. Tax credits, however, reduce your tax liability on a dollar-for-dollar basis, up to the amount of the credit. This direct impact can make credits significantly more powerful than deductions.

Working with a financial advisor can help you develop a tax-efficient strategy that takes full advantage of available credits while aligning with your broader financial goals.

Tax Credits in Action

Let’s say that instead of charitable contributions, you made your home more energy efficient by installing a heat pump. This allows you to claim a $2,000 tax credit, which reduces your tax bill by the full $2,000.

Tax professionals explain that the difference between tax deductions and credits is that credits are “above the line,” meaning that they’re listed before the crucial calculation of your adjusted gross income on Line 11 of IRS Form 1040. ¹  That means they reduce your taxable income by the full amount of the credit. Any additional deductions listed further down your tax form are “below the line,” and reduce your taxes only by the amount of the deduction multiplied by your marginal tax rate. The highest marginal federal tax rate is currently 37%.

And here’s the very best part: some tax credits are partly or fully refundable. That means, if your tax credits are worth more than your tax bill, the difference will be refunded to you in cash. If you’re lucky, deductions might get your tax liability down to $0, but any additional write-off won’t be refunded.

A financial advisor with tax expertise can help you better understand what deductions and credits you may be eligible for.

What Tax Credits Are Available?

Tax credits (and deductions) are listed on the IRS website, and broken down into several categories.

Here’s a look at a combination of individual credits, family, dependent and education credits, as well as clean energy credits.

Child Tax Credit

The Child Tax Credit is worth up to $2,200 per child, with up to $1,700 refundable for 2025.

To qualify, the child must have a Social Security number, be 17 or younger, be claimed as a dependent. Your annual income also must be less than $200,000 for single filers or $400,000 for joint returns. ²

Child and Dependent Care Tax Credit

The Child and Dependent Care Tax Credit is designed to help offset the cost of caring for a qualifying individual so you can work or actively look for work. A qualifying individual may include a child, spouse or another dependent who lived with you for more than half the year and is physically or mentally unable to care for themselves. In most cases, you must file as single, head of household or married filing jointly to claim the credit.

The credit is calculated as a percentage of eligible care expenses paid to a provider, with the percentage based on your adjusted gross income. You can apply up to $3,000 in expenses for one qualifying individual or up to $6,000 for two or more. ³ Eligible expenses generally include costs necessary for the individual’s care and well-being while you work, such as daycare or in-home care.

Excess Social Security Tax Credit

This applies if you had too much Social Security tax withheld by your employer, which can happen if you worked for two or more employers during the year.

If you earned more than the Social Security payroll tax cap of $176,100 in 2025 (increasing to $184,500 in 2026), and paid the 6.2% Social Security tax on earnings above that limit, you may be eligible for a refund via a tax credit. This also applies to railroad retirement tax, as well.

Adoption Tax Credit

For families that finalized the adoption of a child during 2025, the credit is $17,280 per adopted child, with up to $5,000 of that credit being non-refundable.

Foreign Tax Credit

If you have foreign earned income or investments in your portfolio that already were subject to overseas taxes, you can claim this credit to avoid being taxed twice on the same income. This is a more complicated credit and only foreign income taxes paid qualify.

For example, if you worked in France, your French Generalized Social Contribution Taxes aren’t considered income tax by the IRS and don’t count toward this credit.

Education Tax Credits

Both the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC) apply to children and dependents to help with the cost of higher education expenses, such as tuition, certain fees and course materials.

The AOTC, which is refundable for students earning a degree or credential, covers required educational expenses, including necessities like books, supplies and equipment. The credit is worth up to $2,500 per student (total $10,000 over four years) and is also 40% refundable. The LLC is worth 20% of up to $10,000 of educational expenses ($2,000). However, this credit isn’t refundable, has no lifetime limit and doesn’t require the student to be pursuing a degree.

Both these credits start phasing out for taxpayers with modified adjusted gross income (MAGI) of $80,000 for single filers ($160,000 joint) and aren’t available to taxpayers with MAGI of $90,000 or more ($180,000 joint). ⁴

Residential Energy and EV Credits

To promote energy efficiency, the IRS allows for a credit of up to $1,200 for “qualified energy-efficient improvements to your home” during 2025, including energy efficiency improvements, residential energy property expenses (certain types of water heaters, heat pumps, boilers, windows, doors and more) and home energy audits, under the nonrefundable Residential Energy Credit. ⁵

The non-refundable Clean Vehicle Credit covers a qualifying new “plug-in electric vehicle (EV) or fuel cell vehicle (FCV)” purchased before September 30, 2025. ⁶ The credit is worth between $2,500 and $7,500, depending on the specific vehicle.

Bottom Line

Tax credits offer the potential for significant, dollar-for-dollar savings on your federal income taxes. Some can be complex, but it’s well worth your while to make the effort to properly claim them.

Tax Planning Tips

• A financial advisor with tax expertise can potentially help you capitalize on certain tax credits. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

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