A reader recently reached out to me with questions about the Earned Income Tax Credit, prompting me to realize I haven’t touched much on the subject of tax credits. This is a topic that becomes quite relevant, especially for those stepping into early or semi-retirement.
Tax credits are crafted with lower to middle-income individuals in mind. Many of us aiming for financial independence often surpass the income thresholds for these credits during our accumulation phase. As a result, we might overlook them. Yet, during the years when retirement income is lower — either through early retirement or reduced work hours — these credits can become significant.
Let’s dive deeper into the Earned Income Tax Credit and a few other credits worth knowing for strategic tax planning.
## Shifting Focus from Deductions…
In the years we are actively accumulating wealth, tax deductions and exclusions take center stage. Contributions to a traditional 401(k), IRA, or HSA are prime examples, as they allow you to reduce your taxable income for that year. For high-income earners, especially in states with steep income taxes, this can mean significant savings — upwards of 50% almost when combining federal and state tax deferrals. Eventually, the deferred taxes are paid at possibly lower rates in the future.
Related: Early Retirement Tax Planning 101
However, high incomes could phase out or eliminate potential tax credits. It’s easy to dismiss these tools in such scenarios.
## …To Credits
As incomes decrease in early or semi-retirement, the emphasis can shift from deductions to tax credits. Lower income means lower tax brackets, where deductions offer savings of mere cents on the dollar. However, tax credits — which directly reduce taxes owed — gain prominence.
Tax credits are classified as either refundable or non-refundable. Non-refundable credits apply to your tax liability down to zero, but any excess beyond that is lost. On the other hand, refundable credits continue to benefit you even if it means money back if they exceed your tax owed.
Related: Know the Flow, Pay Less Tax
Thus, it’s essential to get familiar with the criteria of tax credits that might benefit you.
## Premium Tax Credit
For those getting health insurance through the government exchange, the Premium Tax Credit stands out as highly beneficial, especially for early and semi-retirees shifting from employer-provided health insurance to Medicare. I’ve previously explored this credit in detail.
Related: Maximize ACA Subsidies and Minimize Health Insurance Costs
Let’s look at some other notable credits.
## Earned Income Tax Credit (EITC)
A reader reaching out about the EITC remarked, “If I manage my ‘earned income’ well, I could qualify for an EITC of several thousand dollars!” That’s quite accurate, but there are several nuances to consider.
The name gives it away; you must have earned income to claim the EITC. This includes wages from employment, self-employment, or certain disability benefits. However, investment income, pensions, social security, unemployment benefits, child support, or alimony don’t qualify.
Moreover, there’s a cap on your adjusted gross income (AGI) which varies based on your filing status and number of dependents.
Traditional retirees without earned income typically don’t qualify for the EITC, and many pursuing early retirement have earnings that are too high. However, if you’re working part-time after reaching financial independence, you might be in a sweet spot to capitalize on the EITC, especially if you have dependents.
For 2025, the investment income threshold is $11,950. Households with no qualifying children can receive a maximum EITC of $649, while those with two children, for instance, could secure as much as $7,152.
This credit holds unique value since it’s refundable.
To qualify for the EITC, you’ll need to meet specific criteria. For larger families, it can be worthwhile to align with these requirements to access this substantial credit.
## Retirement Saving Contributions Credit (aka Saver’s Credit)
Considered a gem for early/semi-retirees with earned income, the Saver’s Credit encourages retirement contributions among lower-income earners.
This credit offers a percentage of your retirement contributions, making it akin to a strong employer match, and can pair with an existing employer match. It’s a strategic move for early retirees who can maneuver funds to leverage this free boost.
The credit starts at 50% of eligible contributions and phases out as income rises. The attached IRS screenshot shows 2024 limits, as the 2025 figures weren’t published yet.
## Child Tax Credit and Credit for Other Dependents
The CTC is probably familiar territory for many, with a $2,000 credit per qualifying child and up to $1,700 being refundable.
Unlike the other credits, the CTC is accessible at higher income levels — up to $400,000 for married couples filing jointly. Children under 17 qualify, but this can extend to adopted, fostered, or grandchildren in your care.
Additionally, there’s the Credit for Other Dependents (ODC), non-refundable at $500 per dependent, ideal for those supporting older children or relatives.
## Education Credits
Parents approaching financial independence as their children near college could benefit from education credits.
The American Opportunity Tax Credit (AOTC) offers up to $2,500 per student, partially refundable. It’s limited to four years of undergraduate studies at qualified institutions for at least half-time enrollment.
Alongside, the Lifetime Learning Credit (LLC) caps at $2,000 per return. It’s non-refundable but versatile, covering courses to enhance job skills and without a limit on usage years.
Both credits have static income thresholds unrelated to inflation, so check those on the IRS website.
## Energy-Efficient and Clean Energy Credits
There’s a variety of credits encouraging energy-efficient improvements and clean vehicle acquisitions, although these are nonrefundable.
### Credits for New Clean Vehicles
Up to 2032, a $7,500 maximum credit exists for new-qualified plug-in EVs or FCVs. Income dictates eligibility, with limitations on vehicle prices.
### Used Clean Vehicle Credit
For budget-friendly retirees, this $4,000 credit applies to purchasing qualifying used EVs or FCVs for $25,000 or less.
Income caps apply, so consult the IRS website for further details and eligible vehicles.
### Energy Efficient Home Improvement Credit
Lastly, consider this and the Residential Clean Energy Property Credit for home enhancements. Eligibility extends across income brackets, covering installations from new windows to solar panels.
## Summing Up
Tax credits hold considerable clout by directly reducing tax liability, with refundable ones offering a potential payback. While not always in the spotlight, some credits like the EITC or Saver’s Credit become more accessible in lower-income years. Others, like clean energy incentives, have gained attraction recently.
Being aware of these options and integrating them into your fiscal strategy is prudent.
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Chris Mamula utilized traditional retirement planning alongside creative lifestyle choices to retire from physical therapy at age 41. Initially disillusioned with financial services, he self-educated on investing and tax strategies. After achieving independence, he began sharing insights at Can I Retire Yet?, co-authored Choose FI: Your Blueprint to Financial Independence, and delivers advisory services at Abundo Wealth.
His insights have appeared on MarketWatch, Morningstar, U.S. News & World Report, and Business Insider, and he has presented at industry conferences like Bogleheads. Contact him at [email protected] or [email protected] for inquiries.
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