Overview

Tax credits are among the most powerful tools for reducing taxes because they reduce your tax bill dollar-for-dollar (and some are refundable). Families and small businesses that proactively identify eligible credits, keep organized records, and claim credits correctly can lower tax bills, improve cash flow, and free up money for savings or reinvestment. The guidance below combines practical steps, common credits to review for 2024–2025, recordkeeping tips, and filing notes to help you maximize available credits while limiting audit risk.

Note: tax rules change. Confirm current-year amounts, thresholds and forms on the IRS website or with a tax professional before filing. (See IRS: Credits & Deductions.)

Quick checklist to maximize tax credits

  • Inventory eligible credits for your household or business each tax year.
  • Gather supporting documents at the time of the activity (receipts, contracts, proof of payment, payroll records).
  • Use the correct IRS form or schedule for the credit (see examples below).
  • If a credit was denied in a prior year, follow instructions (e.g., Form 8862) before reapplying.
  • Work with a CPA or enrolled agent for complex credits (R&D, WOTC, multi-state issues).

Family credits to review

Child Tax Credit (CTC)

The Child Tax Credit provides a direct tax benefit for qualifying children and remains one of the highest-value family credits. Qualifying rules depend on relationship, age, residency and support tests. Amounts, phaseouts and the refundable portion (if any) have changed in recent years, so check the IRS Child Tax Credit guidance for the current tax year before assuming a dollar amount. (IRS: Child Tax Credit)

Useful tactic: confirm that dependent information (Social Security number, name and birthdate) is correct before filing. Mistakes here are a common cause of delays or denials.

Internal link: Read our detailed explainer on the Child Tax Credit: “Child Tax Credit Explained”.

Earned Income Tax Credit (EITC)

The EITC targets low- to moderate-income workers and can be refundable. Eligibility depends on earned income, filing status and qualifying children (or lack thereof). The maximum credit changes annually and varies by number of qualifying children. Claiming the EITC correctly requires accurate earned-income reporting and qualifying-child documentation. (IRS: Earned Income Tax Credit)

Internal link: For more on claiming and audit risks, see our guide “Earned Income Tax Credit (EITC)”.

Child and Dependent Care Credit

If you pay for qualifying childcare (or care for a disabled dependent) so you can work, you may qualify for a credit based on a percentage of eligible expenses. Keep invoices, provider Tax ID or Social Security numbers, and records of payments.

Education Credits

  • American Opportunity Credit: generally available for eligible students in the first four years of higher education; partial refundability rules apply.
  • Lifetime Learning Credit: nonrefundable credit for a wider range of education expenses and students.

Document tuition statements (Form 1098-T), receipts and enrollment status.

Small business credits to prioritize

Small businesses should treat tax credits as part of strategic tax planning — credits lower tax liability dollar-for-dollar and can support hiring, benefits, innovation and energy investments.

Key credits to evaluate:

  • Research & Development (R&D) Tax Credit: for qualified research activities and related wages/supplies. The credit can often be claimed on Form 6765; qualifying activity is defined narrowly under IRS rules so keep contemporaneous project documentation, time tracking and technical descriptions.
  • Work Opportunity Tax Credit (WOTC): for hiring individuals from certain targeted groups (e.g., veterans, long-term unemployed). Employers generally screen new hires using Form 8850 and file certification with the state workforce agency.
  • Small Business Health Care Tax Credit: available to eligible small employers that offer qualified health coverage to employees. Use Form 8941 to compute the credit and include it with your return. (IRS: Small Business Health Care Tax Credit)
  • Energy and Clean Technology Credits: residential energy credits are relevant for businesses that invest in qualifying property, and various federal/state incentives can apply for commercial energy projects.

Internal link: For recordkeeping guidance that helps small businesses substantiate credits, see “Tax Compliance — Essential Recordkeeping Practices to Stay Compliant for Small Businesses”.

How to document and substantiate credits

Good documentation is the most important single step to maximize and protect credits:

  • Create a credit folder (digital and/or physical) for each tax year.
  • Save receipts, invoices, canceled checks and bank statements showing payment dates and payees.
  • For employment-related credits, keep signed job applications, Form 8850 (WOTC pre-screen), payroll registers and Form W-2s.
  • For R&D credits, maintain project descriptions, time logs, payroll allocations and invoices for materials or subcontractors.
  • For energy credits, keep manufacturer statements (e.g., IRS Form 5695 supporting docs), contractor invoices and proof of payment.

Why contemporaneous records matter: records created at or near the time of the activity are far more credible in an IRS exam than reconstructed notes created years later.

Filing mechanics and common forms

  • Individual credits such as the Child Tax Credit and education credits are generally claimed on Form 1040 and associated schedules (e.g., Form 8863 for education credits, Schedule EIC for the EITC).
  • Small-business credits often require business forms such as Form 6765 (R&D), Form 8941 (Small Business Health Care Credit) and Form 5884 (Work Opportunity Credit), and many credits attach to the business tax return (Schedule C, Form 1120S, Form 1065, etc.).
  • If a credit was previously denied, you may need Form 8862 to claim certain refundable credits again.

Always read the instructions for the current tax year and consider e-filing with reputable software or a preparer that supports the specific credit forms.

Real-world approach: how I apply this for clients

In my practice I follow a three-step routine:

  1. Screen every client for credits at their first annual planning meeting (family size, schooling, energy projects, hires).
  2. Create a simple documentation checklist tied to each credit we expect to claim.
  3. Reconcile claimed credits with supporting schedules and source documents before the return is filed.

This approach reduces surprises at filing and minimizes the chance of a post-filing notice from the IRS.

Common mistakes and audit triggers

  • Missing or incorrect Social Security numbers for dependents.
  • Poorly documented business activity or lack of time-tracking for R&D claims.
  • Failing to use the correct forms or claiming credits after a disallowance without required forms.
  • Overstating expenses or wages tied to a credit when records don’t support amounts.

If you receive an IRS notice about a credit, don’t ignore it. Respond by the deadline and supply organized documentation or seek professional help.

Frequently asked questions

Q: Are tax credits refundable?
A: Some are (like the EITC and certain portions of the Child Tax Credit historically have been refundable), meaning they can generate a refund if the credit exceeds tax owed. Others are nonrefundable and only reduce tax liability to zero.

Q: Can I claim both a credit and a deduction for the same expense?
A: Generally, you cannot double-dip — consult the specific credit rules. For example, certain education tax benefits restrict claiming multiple benefits on the same expenses.

Q: When should a small business involve a CPA for credit claims?
A: Engage a CPA before claiming complex credits (R&D, multi-jurisdictional hiring credits) or when projected credits materially affect cash flow or tax planning.

Next steps and resources

  • Review the IRS Credits & Deductions page and the specific credit pages for current-year amounts and forms: https://www.irs.gov/credits-deductions
  • For EITC details and eligibility tests, see the IRS EITC resources.
  • If you run a small business, set a recurring calendar reminder to document payroll and hiring steps that support WOTC and other employer credits.

Internal links:

Professional disclaimer

This article is educational and does not constitute personalized tax advice. Tax laws and credit amounts change frequently; consult a qualified tax professional or the IRS website for advice tailored to your situation.

Authoritative sources