Tax Credits That Should Be On Your Radar
I recently received an email from a reader asking me about the Earned Income Tax Credit. It made me realize, I’ve written little about tax credits. This is an important topic that early retirees and semi-retirees, in particular, should be aware of.
Tax credits are often targeted to lower and middle income individuals and households. Many people who are able to save aggressively towards financial independence have too high of income to qualify for these credits in their accumulation years.
So these tax credits are not on our radar. No income years of early retirement or lower earning years of semi-retirement may enable you to benefit from these credits.
It’s worth exploring the Earned Income Tax Credit and several other credits you should be aware of for tax planning.
Shifting Focus from Deductions…
During our accumulation years, we focus on tax deductions and exclusions. For example, contributions to a traditional 401(k), IRA, or HSA account allow you to exclude or deduct your contribution amount from your taxable income. Those dollars are then not subject to income tax in that year.
Deductions or exclusions can save you 37% of federal income tax for the highest earners in the top marginal tax bracket. For high earners in states with high income tax, the combined federal plus state tax savings can be in the neighborhood of 50%. You may then pay this deferred tax at lower rates later.
Related: Early Retirement Tax Planning 101
However, higher incomes may cause tax credits to phase out or be eliminated. So we tend to pay less attention to these important tools that also decrease taxes.
…To Credits
Tax deductions and exclusions become less valuable when we transition to lower earning years of early or semi-retirement. Lower incomes mean lower tax brackets. Those same deductions may only save you ten or twelve cents in federal income tax on each dollar of income.
However, more tax credits come into play in lower-income years. Tax credits offset tax dollar for dollar that you would otherwise owe. There are two types of tax credits, refundable and non-refundable.
Non-refundable tax credits offset any tax you owe until it reaches zero. If non-refundable credits exceed tax owed any further benefit of the credit is lost.
Refundable tax credits also offset any tax owed dollar for dollar down to zero. However, if your refundable credits exceed your tax owed, the remaining credit is paid to you as a tax refund.
Related: Know the Flow, Pay Less Tax
Therefore, it is wise to understand the requirements for tax credits you may qualify for.
Premium Tax Credit
The Premium Tax Credit for those purchasing health insurance through the government exchange is the most common and potentially valuable credit for early and semi-retirees bridging the gap from employer-provided health care to Medicare. I’ve covered it separately in depth in a previous post.
Related: Maximize ACA Subsidies and Minimize Health Insurance Costs
Let’s explore a few other credits you should be aware of.
Earned Income Tax Credit (EITC)
The reader who sent me the email about the EITC noted “It looks like if I can control ‘earned income’, I can get an EITC of up to several thousand dollars!” That is correct, but…. There are a lot of “buts” you need to understand about this credit.
First, as the name of the credit indicates, you must have earned income to qualify for the credit. Earned income includes money earned through employment, self-employment, or certain disability benefits. Earned income does not include investment income, pensions or annuities, Social Security benefits, unemployment benefits, child support, or alimony.
You also can’t have too much income. The maximum adjusted gross income (AGI) to qualify for the EITC depends on your filing status and the number of dependents you can claim on your tax return.
This means traditional retirees with no earned income couldn’t qualify for the EITC based on lack of earned income, and most people who can save toward early retirement wouldn’t qualify because they make too much income.
However, semi-retirees or those who work part-time after financial independence may be in a great spot to thread the needle required to qualify for the EITC. Those with dependents in particular are both more likely to benefit and the benefit is more valuable. The screenshot below shows 2025 thresholds taken from the IRS website.
There is a separate threshold for investment income as well. For 2025, you can’t have greater than $11,950 of investment income to qualify for the EITC. So those with large taxable accounts or accounts that hold tax-inefficient investments may not qualify for the EITC either.
The maximum amount of the credit is based on your household size. A household with no qualifying children could get a maximum EITC of $649 in 2025. The reader who emailed me has two children, meaning he could get a maximum credit of $7,152 (see table).
This is a refundable credit making it particularly valuable.
The take-home message is that there are a lot of boxes to check to qualify for the EITC. For larger households, it may make sense to go out of your way to check those boxes to get this potentially valuable credit.
Retirement Saving Contributions Credit (aka Saver’s Credit)
Another credit that should be on your radar if you are an early/semi-retiree with earned income is the Saver’s Credit. This credit incentivizes those with lower incomes to contribute to retirement accounts.
The credit is a percentage of your contribution to a retirement account. Eligible accounts include IRAs/Roth IRAs and almost all work-sponsored plans.
The maximum amount that may qualify for the credit is a $2,000 contribution for single filers and $4,000 for MFJ filers. The maximum credit is 50% of the contribution, $1,000 for single filers or $2,000 for MFJ filers.
This is akin to a generous employer match (and may be claimed on top of an employer match). For an early retiree with a little earned income and the ability to take money from one pot and put it into another, it is a no-brainer to take advantage of this free money if getting the full credit is possible.
The credit decreases to 20%, then 10% of eligible contributions before completely phasing out at higher incomes. The screenshot below was taken from the IRS website and shows 2024 income limits. (2025 numbers were not yet available.)
Child Tax Credit and Credit for Other Dependents
The Child Tax Credit (CTC) is one credit many of you are likely familiar with. The CTC is valuable due to the amount of the credit, $2,000/qualifying child, and the fact that $1,700 of the credit is refundable (2025).
It is also easier to qualify for the CTC at higher income levels, which is why so many of us are familiar with it. You qualify for the full credit if your AGI is under $400,000 for married filing jointly (MFJ) taxpayers and $200,000 for all other filing statuses and you have a qualifying child.
A qualifying child for the CTC must be less than 17 years old at the end of the tax year. Find the full list of qualifications to claim the CTC at the IRS website.
A key thing I want to highlight for blog readers is that qualifying children are NOT limited to your biological children. You may qualify for this credit if you are raising a grandchild, have adopted, or are fostering.
Another thing to note is that older children and other dependents, such as parents or other relatives you support, may qualify for the related Credit for Other Dependents (ODC). This credit is non-refundable and has a maximum amount of $500 per dependent.
So while less valuable than the CTC, the ODC is another credit to be aware of to potentially provide a little financial relief, particularly for those caring for parents or other relatives.
The ODC has the same income limits as the CTC to qualify. Here is a link to the IRS website for the full list of qualifications for the ODC.
Education Credits
You may be approaching financial independence around the same time your children are reaching college age. If so, your lower income may help you qualify for several education credits.
The first credit to be aware of is the American Opportunity Tax Credit (AOTC). This credit has a maximum value of $2,500 per student. It is partially ($1,000 maximum) refundable.
The AOTC is good only for students attending a qualified college or university at least half-time. It is available only for undergraduate studies and for a maximum of four years per student. Multiple individuals in the same household can qualify for the AOTC in the same year.
Find the full details of the AOTC on the IRS website.
A second education credit is the Lifetime Learning Credit (LLC). The maximum credit is $2,000 per year per return and is non-refundable.
While the LLC has a lower maximum credit amount, it also has fewer restrictions. There is no limit to the number of years you can use the LLC. You can also use the LLC for various programs (graduate courses, courses to improve job skills, etc.). You don’t have to take a minimum number of credits nor be working towards a degree to qualify.
Find the full details of the LLC on the IRS website.
Income limits on these education credits are not adjusted for inflation annually. To claim the full credit, your income (MAGI) must be $160,000 or less if MFJ, and $80,000 or less for all other filing statuses except MFS in which case you are not eligible for these credits. The credits phase out over a $20,000 range between incomes of $160,000-180,000 for MFJ households, or a $10,000 range between incomes of $80,000-90,000 for all other filers.
Follow this link to the IRS website for a nice chart comparing the two education credits.
Energy-Efficient and Clean Energy Credits
Multiple tax credits incentivize purchasing clean cars and making homes more energy efficient. These are all nonrefundable credits.
I’ll start with the car credits. Consistent with our theme, they have income limits to qualify.
Credits for New Clean Vehicles
Through 2032, a maximum $7,500 tax credit is available if you purchase a new qualified plug-in electric vehicle (EV) or fuel cell electric vehicle (FCV). The car must not have a manufacturer’s suggested retail price greater than $80,000 for vans, SUVs, and pick-up trucks or $55,000 for other vehicles.
Qualifying for this credit is based on your Modified AGI for the year you took possession of the car or the previous year (whichever is less). Income limits are:
- $300,000 for married couples filing jointly or a surviving spouse
- $225,000 for heads of households
- $150,000 for all other filers
Find out what vehicles qualify by using the tool found at this link.
Full details about the New Clean Vehicle Credit can be found on the IRS website.
Used Clean Vehicle Credit
More frugal early retirees and those with lower incomes may be interested in and able to qualify for the Used Clean Vehicle Credit if you buy a used EV or FCV from an authorized dealer for $25,000 or less. The maximum credit is $4,000.
Income limits for this credit are Modified AGI not more than:
- $150,000 for married filing jointly or a surviving spouse
- $112,500 for heads of households
- $75,000 for all other filers
Full details about the Used Clean Vehicle Credit can be found on the IRS website.
There is also a tool to check which vehicles qualify.
Energy Efficient Home Improvement Credit
For completeness, I’ll briefly note The Energy Efficient Home Improvement Credit and Residential Clean Energy Property Credit. Unlike the other credits mentioned, there are no income limits to qualify for these credits.
I won’t go into details on these credits. Instead, I’ve linked to the IRS site for each of them above. Give those sites a look if you’re planning to make any improvements to your residence including, but not limited to:
- New doors, windows, etc.
- New furnace, A/C unit, etc.
- Solar panels, geothermal heat pumps, etc.
Summing Up
Tax credits are valuable because they reduce the tax you would otherwise owe dollar for dollar. Some credits are refundable, meaning you get money back if your credits exceed the tax you owe.
Many of these credits are not on our radar. Some like the EITC and Saver’s Credit are hard to qualify for during higher income accumulation years. Others like the Energy Efficient and Clean Energy Credits have been made more generous in recent years.
You should be aware of these credits and incorporate them into your planning.
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[Chris Mamula used principles of traditional retirement planning, combined with creative lifestyle design, to retire from a career as a physical therapist at age 41. After poor experiences with the financial industry early in his professional life, he educated himself on investing and tax planning. After achieving financial independence, Chris began writing about wealth building, DIY investing, financial planning, early retirement, and lifestyle design at Can I Retire Yet? He is also the primary author of the book Choose FI: Your Blueprint to Financial Independence. Chris also does financial planning with individuals and couples at Abundo Wealth, a low-cost, advice-only financial planning firm with the mission of making quality financial advice available to populations for whom it was previously inaccessible. Chris has been featured on MarketWatch, Morningstar, U.S. News & World Report, and Business Insider. He has spoken at events including the Bogleheads and the American Institute of Certified Public Accountants annual conferences. Blog inquiries can be sent to chris@caniretireyet.com. Financial planning inquiries can be sent to chris@abundowealth.com]
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Hey Chris, another great comprehensive article. With the EITC, we know there is a maximum income before you can’t earn the tax credit, but is there a minimum? Could someone cut down a tree and claim $500 in self-employed earned income for the year, or work a part-time seasonal job and get $3,000 for the year and still qualify for $7K tax credit if they have two kids?
Thanks Tim.
There is no minimum to earn some credit, but there is a minimum to earn the full amount of the credit. Use this calculator to calculate the amount of credit you can qualify for.
Best,
Chris