Have you ever owed taxes after you’ve filed your return in April? If so, you’re probably looking for ways to save this tax season. Seeing which tax credits you qualify for can make a big impact on your tax bill this season.
Tax credits are a big advantage to taxpayers. Qualifying for a credit is like finding money in your wallet that you didn’t know you had. Read the following for information on the most common credits, and see if you can find a little extra cash this tax season.
Different from Deductions
Tax credits are different from deductions, and it’s an important distinction to make. A deduction is an amount equal to your expenses that you are able to subtract from your total adjusted gross income (AGI), lowering your amount of taxable income. The lower your income, the less money you have to be taxed on.
Deductions are great at lowering your bill. Tax credits are even better, because they actually reduce your taxes dollar for dollar. There’s even some refundable credits, of which you’ll receive the remaining balance of after they reduce your tax bill to zero. For example, if you get a $1,000 credit, and only owe $200 in taxes, you’ll receive $800 back. That’s actual money back in your pocket. Many tax credits aren’t refundable, so ensure you check each one’s stipulations carefully.
Regardless of refundability, a tax credit of $10,000 is better at reducing your taxes when compared with a $10,000 deduction.
Two Taxpayer Categories
The more common credits generally apply to taxpayers in two different groups. Remember that credit have many rules and qualifications, so be sure to research each in depth to see if you are eligible. The following is a summary of the common credits available to taxpayers in two categories.
PEOPLE WITH CHILDREN
Child Tax Credit: With a max of up to $1,000 per child, this credit can be a big savings for you. The more you make, the less you are eligible for. Married taxpayers who file a joint return in 2015, get docked $50 for every $1,000 that their AGI exceeds $110,000.
Child and Dependent Care Credit: This credit is typically worth 20% to 35% of expenses up to $3,000, including daycare and similar costs, incurred for any child under age 13, or an incapacitated spouse, parent or dependent, so you can go to work. Two or more dependents raise the threshold to $6,000, and the percentage relates to your income. Taxpayers with less than $15,000 AGI are entitled to 35% of their expenses, and it shrinks by one percent for every $2,000 of additional income. At $43,000 the rate is capped at 20%, and any expenses paid from a dependent care account or other untaxed account at work may reduce the amount of the credit you receive.
Earned Income Credit: In 2016, this credit can net you anywhere from $3,373 and $6,269, ($3,400 and $6,318 for 2017) depending on certain factors: how many children you have, your marital status, and your income. If your AGI is less than $54,000, this credit may save you some cash. Although, if you have interest, dividends, capital gains, or other certain forms of income in 2016 that total more than $3,400, you are ineligible for the credit ($3,450 in 2017). If you don’t have children, you may still receive up to $506 in 2016 ($510 in 2017) if your income is less than $14,880 ($15,010 in 2017) and you file single, or $20,430 ($20,600 in 2017) if you file jointly.
Adoption Credit: This credit is worth up to $13,400 ($13,470 in 2017) of adoption expenses per child in 2016. At an AGI of $201,010 or higher ($203,540 in 2017) the credit phases out, and those with income higher than $241,010 ($243,540 in 2017) are ineligible for the credit. You have to file a joint return if you’re married, and the adoption must be finalized for the credit to apply. If you are legally adopting your spouse’s child, the credit doesn’t apply. Taxpayers who adopt children with special needs can get the full credit regardless of their actual expenses.
PEOPLE WHO INVEST – BUSINESS OR EDUCATION
Saver’s Credit: Taxpayers who make contributions to an IRA, 401(K), 401(b) or other certain retirement plans may qualify for between 10% and 50% of up to $2,000 in contribution through this credit. It is dependent on status and income, though taxpayers with less than $61,500 generally benefit.
American Opportunity Tax Credit: For students enrolled in their first four years of college, this credit applies for up to $2,500 per student and covers tuition, activity fees, supplies, equipment, and books. The student can’t have a felony conviction and must be enrolled at least half-time. This credit applies to parents if they claim the student as a dependent. Additionally, the credit phases out as income increases, and those with incomes higher than $90,000 filing single ($180,000 joint) don’t qualify.
Lifetime Learning Credit: This credit applies toward tuition, activity fees, books, supplies, and equipment expenses up to $2,000 for traditional and nontraditional students, even those not pursuing a degree. There is no workload requirement, which makes it different from the American Opportunity credit. However, this credit is only available one per return, not per student, so the most you can receive is $2,000 no matter how many students you pay for. Additionally, this credit phases out with income, and taxpayers with AGIs greater than $65,000 single ($130,000 joint) in 2016 won’t qualify. You are only eligible to take one credit: either the LLC or the American Opportunity credit.
