Preliminary Work and Taxpayer Data · Preliminary work to prepare tax returns

Sources of applicable credits

Nothing arrives in the mail to tell you a client is entitled to a credit. Deductions have information returns behind them and income has payers behind it, but credits are found by asking — who lives with you, who did you pay to look after them, who is at school, what did you pay a foreign government, what did you put into a retirement account. A missed credit is the most expensive kind of intake failure because nothing later in the return points back at it.

The rule

Where a credit sits decides what it can do. The nonrefundable personal credits are in subpart A of part IV, and their aggregate is capped: the credits allowed by that subpart cannot exceed the sum of regular tax liability reduced by the foreign tax credit allowable under § 27, plus the tax imposed by § 55(a) (IRC § 26(a)). Refundable credits are in subpart C and carry no such cap, which is why several provisions work by moving an amount from one subpart to the other rather than by calling it refundable — § 23(a)(4) and § 25A(i) both do exactly that.

The child tax credit and the credit for other dependents. A per-child credit applies below a threshold, both amount and threshold made permanent by Pub. L. 119-21 § 70104 (IRC § 24(h)(2), (h)(3)), and part of it is refundable. A smaller, separate credit applies for each dependent as defined in § 152 who is not a qualifying child (IRC § 24(h)(4)(A)) — and a qualifying child denied the main credit for want of a social security number is treated as such a dependent instead (IRC § 24(h)(4)(C)). The figures are in the table below. Two social security numbers are now required for the main credit: the child’s and the taxpayer’s own, or at least one spouse’s on a joint return, each issued before the return’s due date (IRC § 24(h)(7)).

Child and dependent care. The credit is the applicable percentage of employment-related expenses, capped by the § 21(c) expense limits. The applicable percentage was rewritten for 2026 and now steps down twice rather than once (IRC § 21(a)(2)).

Education. The American Opportunity credit is a per-student amount, forty percent of it treated as allowed under subpart C (IRC § 25A(b)(1), (i)). The Lifetime Learning credit is a percentage of expenses up to a ceiling, per return rather than per student, and wholly nonrefundable (IRC § 25A(c)(1)). Both share one phase-out (IRC § 25A(d)(1)), and both now require the claimant’s social security number, plus the student’s where the student is not the taxpayer or spouse, and the institution’s employer identification number for the American Opportunity credit (IRC § 25A(g)(1)).

Foreign tax. Foreign taxes are allowed as a credit against the tax imposed by chapter 1 to the extent § 901 provides (IRC § 27). The ceiling is proportional: the credit cannot exceed the same proportion of the tax as foreign-source taxable income bears to entire taxable income (IRC § 904(a)). Where the client is also excluding foreign earned income, the two provisions interact and the choice between them is a computation, not a preference.

Retirement savings and adoption. The § 25B credit is a percentage of qualified retirement contributions that steps down across three income bands and disappears above the top one (IRC § 25B(b)(1)). The adoption credit is limited to qualified adoption expenses, and a fixed slice of it is now treated as allowed under subpart C rather than subpart A (IRC § 23(a)(4)).

Three energy credits have ended, on different dates and different tests — expenditures made, property placed in service, vehicle acquired (IRC §§ 25D(h), 25C(i), 30D(h)).

Four of these credits carry a preparer penalty. Failure to meet the due diligence requirements for head of household status or for the credits allowable by § 24, § 25A(a)(1) or § 32 is penalised per failure (IRC § 6695(g)). Note the reach: § 25A(a)(1) is the American Opportunity credit, so the Lifetime Learning credit is outside the rule.

Current figures

How it works in practice

Interview for the facts that create credits, not for the credits. “Did anyone live with you who is not on this return” finds dependents. “Who looked after them while you worked” finds § 21, and the follow-up about the provider’s identifying number is what makes the claim survivable. “Is anyone in the household enrolled anywhere” finds § 25A, and the tuition statement alone will not tell you which credit is better, because one is per student and the other per return.

Then sequence the credits, because the § 26(a) cap makes order matter. Nonrefundable credits compete for the same liability, so a client with modest tax can lose a credit entirely by having claimed another first — and the credits that partly live in subpart C survive that competition to the extent of the moved amount. The practical consequence is that identifying a refundable slice matters more for low-liability clients than the headline size of any credit.

Two documentation habits pay for themselves. First, collect identifying numbers at intake rather than at filing: the § 24(h)(7) social security numbers must be issued before the due date of the return, so a pending application is a scheduling problem to solve in March, not April. Second, for any return claiming the child tax credit, the American Opportunity credit, the earned income credit or head of household status, treat the § 6695(g) due diligence file as part of the return rather than as paperwork about it.

How this has changed

The child and dependent care credit was rewritten. Pub. L. 119-21 § 70405(a) amended IRC § 21(a)(2) generally; § 70405(b) applies it to taxable years beginning after 31 December 2025. The prior text ran a single reduction from a lower starting rate to a lower floor. The new text starts higher, floors the first reduction well above the old floor, and adds a second reduction keyed to a much higher income threshold. This is the largest structural change to a personal credit on the 2026 return.

Education credits closed to ITIN filers. Section 70606(a) rewrote IRC § 25A(g)(1) to require a social security number where the prior text accepted a taxpayer identification number, effective for taxable years beginning after 31 December 2025.

The child tax credit became permanent at the higher amount. Section 70104 made the § 24(h) rules permanent — they had been scheduled to lapse after 2025 — set the amount, and IRC § 24(i)(2) now indexes it for years beginning after 2025. The refundable cap in § 24(h)(5) has been indexed since 2024 and is announced annually.

The adoption credit became partly refundable. Section 70402(a) added IRC § 23(a)(4), treating a fixed slice as allowed under subpart C, applicable to taxable years beginning after 31 December 2024 — so 2025 was the first year, and the refundable slice is indexed.

Three energy credits ended. IRC § 25D(h) ends the residential clean energy credit for expenditures made after 31 December 2025. IRC § 25C(i) ends the energy efficient home improvement credit for property placed in service after that date. IRC § 30D(h) ends the new clean vehicle credit for vehicles acquired after 30 September 2025 — an earlier date and a different test from the other two, and the one most likely to catch a 2026 interview about a 2025 purchase.

Exam focus

Know which credits are refundable, partly refundable and nonrefundable, and be able to explain the mechanism — the statute moves an amount into subpart C rather than describing it as refundable.

The § 21 percentage is new and therefore examinable. Learn the two thresholds, the two floors, and that the second reduction runs at a different rate on a joint return.

Expect identification-number questions. The child tax credit needs the taxpayer’s number as well as the child’s; the education credits now need a social security number rather than any taxpayer identification number; and the deadline is the return’s due date, which an extension moves.

Finally, know the § 6695(g) list exactly, because the reliable version of that question offers the Lifetime Learning credit as the exception.

Check yourself

1. A taxpayer’s qualifying child has an ITIN but no social security number. What credit, if any, is available for that child?

Answer: the credit for other dependents. IRC § 24(h)(7) denies the child tax credit without the child’s social security number, but IRC § 24(h)(4)(C) treats a qualifying child denied the credit by reason of paragraph (7) as a dependent to whom the $500 credit for other dependents applies.

2. Why can a nonrefundable credit be lost even though the taxpayer plainly qualifies for it?

Answer: because IRC § 26(a) caps the aggregate of the subpart A credits at regular tax liability reduced by the foreign tax credit allowable under § 27, plus the § 55(a) tax. Once other nonrefundable credits have absorbed that liability there is nothing left for the credit to offset, and subpart A credits do not produce a refund.

3. A married couple filing jointly paid $5,000 in tuition for one dependent undergraduate and $7,000 for another in a master’s programme. Can they claim the American Opportunity credit for one and the Lifetime Learning credit for the other?

Answer: yes, but the two behave differently. The American Opportunity credit is computed per eligible student under IRC § 25A(b)(1), so it applies to the undergraduate on that student’s own expenses. The Lifetime Learning credit under IRC § 25A(c)(1) is a percentage of expenses up to a single ceiling per return, not per student. IRC § 25A(c)(2)(A) prevents double-counting: expenses of a student for whom the American Opportunity credit is allowed are not taken into account under the Lifetime Learning subsection at all.

4. A client bought an electric vehicle in November 2025 and installed rooftop solar in February 2026. Which credits are available?

Answer: neither. IRC § 30D(h) denies the clean vehicle credit for any vehicle acquired after 30 September 2025, so the November purchase is outside it. IRC § 25D(h) provides that the residential clean energy credit does not apply to expenditures made after 31 December 2025, so the February installation is outside that. The two provisions use different dates and different tests, which is why each has to be checked on its own terms.