When you’re trying to find ways to keep more of the money you worked so hard to earn, income tax credits can do the trick. You can make significant cuts to your annual tax bill by taking advantage of all the tax credits you may have coming to you.
Think about income tax credits as legal loopholes that can slash your yearly income tax bill. So you may as well take advantage of them, especially because they can save you a lot of money when you qualify.
Here are 7 common income tax credits you should look at when you’re preparing your taxes.
Tax Credits are Like Coupons for Taxes
When it comes to taxes, there’s nothing you want more than income tax credits. These are dollar-for-dollar reductions to your tax bill. A $100 tax credit means you owe $100 less to the IRS.
There are two basic types of income tax credits:
Nonrefundable Tax Credits
These tax credits help lower the amount of taxes you owe. They can reduce that amount all the way to $0, but that’s it. If your total nonrefundable tax credits are greater than your total taxes, you don’t get anything back from the IRS.
Refundable Tax Credits
These valuable tax credits can result in a refund from the IRS if they reduce your current tax bill past $0, so you’d end up with a refund. In that case, the IRS would pay you the remaining balance of the tax credit.
Tax credits tend to come with a lot of conditions for taxpayers to meet — they’re not available to everyone. Congress creates tax credits to support their pet policies but always attaches lots of qualifications to limit the number of people who can take advantage.
The IRS oversees the tax credits, often looking over tax returns that include them more carefully. That doesn’t mean you shouldn’t take every credit you qualify for. But it does mean that if you don’t meet all of the eligibility requirements and still take the credit, the IRS will know. So, make sure you take an extra look at the requirements before you take them.
While there are several categories of tax credits, this post will focus on the most commonly taken including child-related tax credits, education tax credits, and tax credits related to current or future financial security.
Help for Parents with Child-Related Tax Credits
Several popular income tax credits revolve around children. These were designed to provide a financial break for families. There are three main direct credits in this category:
- The Child Tax Credit
- The Child and Dependent Care Credit
- The Adoption Credit
The Child Tax Credit (CTC)
This is a nonrefundable tax credit for taxpayers with qualifying children younger than seventeen (as of December 31 of the tax year) who have valid Social Security numbers.
Some families may qualify for the refundable portion—the Additional Child Tax Credit (ACTC)—based on their income. The maximum CTC is $2,000 per qualifying child, with the ACTC portion of $1,700 each.
Both credits begin to phase out for taxpayers with Modified Adjusted Gross Income (MAGI) over $200,000 ($400,000 if married filing jointly). To take advantage of these credits, you must complete Schedule 8812 as part of your tax return.
The Child and Dependent Care Credit
This nonrefundable income tax credit is available for working taxpayers who pay for childcare for children under age thirteen or disabled dependents of any age. The credit is based on expenses you paid to a qualified caregiver so you were able to work, look for a job, or go to school.
The maximum expense for one qualifying child is $3,000, and $6,000 for two or more qualifying children. If you receive dependent care benefits from your employer, you have to deduct that from the childcare expenses you paid.
Depending on your Adjusted Gross Income (AGI), the credit ranges from 20% to 35% of the expenses. So the maximum credit is $1,050 for one child or $2,100 for two or more. To take the credit, you have to identify the caregivers, including their tax ID numbers (spouses and your older dependent children don’t qualify). You must complete Form 2441 to take this credit.
Credit for Other Dependents
If you have dependents over age seventeen, like a college-age child or a parent, you may be able to claim the Credit for Other Dependents (ODC ). This non-refundable $500 tax credit covers people you support and can claim as dependents on your tax return other than minor children.
The Adoption Tax Credit
This is a nonrefundable credit used to offset the costs of adoption. You can receive a tax credit for all of the qualified adoption-related expenses you paid up to $16,810 per child.
The credit begins to phase out when your MAGI reaches $252,150. While this
credit is not refundable; the unused portion can be carried forward for up to five years. To claim this credit, you’ll complete and file Form 8839 with your tax return.
The Earned Income Tax Credit – Helping Low-Income Taxpayers
The Earned Income Tax Credit (EITC) is a refundable tax credit for low-income taxpayers. Even if you don’t owe any taxes and wouldn’t otherwise need to file, you can still get this money, if you meet all the requirements.
Be aware that filing for this credit can delay your tax refund by several weeks, but it can be worth the wait for eligible taxpayers.
Taxpayers may qualify for the EITC if they have:
- Earned income
- Are US citizens or resident aliens
- Have valid Social Security numbers
- Are at least twenty-five years old and younger than sixty-five
- Are not claimed as someone else’s dependent or child for the EITC
- Don’t have more than $11,600 in investment income (for 2024),
- Don’t have an income exceeding IRS limits for the family size
The income limits change every year, and they’re based on family size. The highest limits go to married couples (filing jointly) with at least three qualifying children.
Qualifying children must live with you for at least half the year, be younger than nineteen (twenty-four if they’re in school full-time), and include your children, stepchildren, foster kids, grandchildren, sisters, brothers, nieces, and nephews.
The maximum EITC (for tax year 2024) ranges from $632 for taxpayers with no children to $7,830 for families with at least three children. You can find all the details of annual income limits and qualifying children on the IRS website at www.irs.gov.
Though many taxpayers qualify for this tax credit, many don’t get it simply because they don’t file tax returns. It’s worth filing — even if you don’t need to —just to get this money.
Save for Your Future with the Saver’s Credit
The Saver’s Credit offers a tax benefit to lower-income taxpayers who contribute to any kind of retirement accounts, a sort of bonus for saving money for later. The amount of your credit will be 10%, 20%, or 50% of your retirement contribution depending on your AGI (the limits change every year).
These have to be new contributions, not rollovers, in order to qualify. You can’t take this credit if you’re under eighteen, a full-time student, or claimed as a dependent on someone else’s tax return.
The credit is based on up to $2,000 of contributions for single filers and $4,000 for married filing jointly. That makes the maximum credit $1,000 for single filers and $2,000 for married filing jointly.
To take advantage of the Saver’s Credit, you have to complete IRS Form 8880 as part of your tax return. This credit is non-refundable, so it can lower your tax bill to zero but not generate a tax refund.
Get Smart About Education Credits
There are two tax credits available to offset the costs of post-high school education: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC).
Though each has its own set of rules, they do have five in common:
- Qualified education expenses were paid for higher education.
- An eligible student had to be enrolled at an eligible institution.
- That eligible student is you, your spouse, your dependent child, or another dependent that you can claim on your taxes.
- You can’t claim the credit if your filing status is married filing separately.
- You must file IRS Form 8863 with your tax return to claim the credit.
The American Opportunity Tax Credit
The AOTC is a partially refundable credit that can help you lower your tax bill by up to $2,500, and up to 40% of that may be refundable. To claim it you must have paid at least that much in qualified education expenses such as tuition, books, supplies, and mandatory fees (like lab fees) during the tax year.
You get to claim 100% of the first $2,000 you spent and 25% of the next $2,000. The credit begins to phase out (for 2024) for single taxpayers with MAGI of $80,000 (or $160,000 for married filing jointly) and disappears if the MAGI exceeds $90,000 ($180,000 for married filing jointly).
This credit is available only for undergraduate students pursuing degrees or other credentials within their first four years of higher education and can only be claimed for four years.
If you are the student and paid these expenses, you can claim the credit if no one else can claim you as a dependent. If you’re the parent and paid the expenses for your child, you can only claim the credit if you can also claim the child as a dependent. If you did not directly pay the expenses, you cannot take this credit.
The Lifetime Learning Credit
The LLC can be used for any kind of qualified higher education expenses, including those used to gain or improve job skills. This nonrefundable credit can reduce your tax bill by up to $2,000 per year, with no limit on the number of years it can be claimed.
Unlike the AOTC, you don’t have to pursue a degree to qualify for this credit—you can just take courses. The LLC covers expenses paid for tuition and fees required for enrollment.
You can claim both credits in the same tax year but not for the same student or the same expenses. The IRS offers an interactive app to help you figure out which education credit you qualify for. You can find that on their website at www.irs.gov.
Want More Ways to Save Money On Your Tax Bill?
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