Tax credits save many families thousands of dollars each year when they file their tax returns. The Tax Cuts and Jobs Act eliminated several tax deductions but the majority of available tax credits have remained. When tax planning, you should know the difference between a tax credit and a tax deduction. A tax deduction reduces the amount of your taxable income whereas a tax credit is a reduction in the amount of tax you owe or an increase in the amount refunded to you.
Another important distinction is the difference between refundable and nonrefundable tax credits. Both will reduce your tax liability but a refundable tax credit can continue to reduce your tax liability beyond zero, while a nonrefundable credit cannot. Tax credits can be extremely valuable if you qualify. There are a few tax credits that you should know about and are detailed below.
Tax Credits to Know When Filing
- The Child Tax Credit
For you to receive the tax credit, qualifying children must be under 17 and depend on you financially. The tax credit is worth as much as $2,000 per qualifying child and can be claimed for every qualifying dependent. The Child Tax Credit is partially refundable up to $1,200 for each qualifying child on your tax return. Keep in mind the Child Tax credit is income restricted.
- The Credit for Other Dependents
Taxpayers can now receive tax credit for other dependents. You can claim a child over 16 and an aging parent that lives with you and supported financially by you. This tax credit is non-refundable and up to $500 for other dependents meaning it cannot reduce your tax liability beyond zero. And just like the Child Tax credit it will start to phase out above certain thresholds.
- Child and Dependent Care Credit
For working parents, this nonrefundable tax credit was designed to make child care affordable but you must meet qualifications. These qualifications include: must have earned income through year, cannot file Married Filing Separately, paid child care was for child under 13 or disabled dependent of any age and child expenses were paid so you could work. If you qualify, tax credit is worth 20% to 35% of qualifying expenses depending on your adjusted gross income.
- Earned Income Tax Credit (EITC)
Tax credit designed to lower taxes for workers with lower incomes. Credit is income-restricted and you must meet qualifications to be able to claim the Earned Income Credit. You must have earned income, be a U.S. citizen or resident alien the entire year and everyone on the return must have a Social Security number. When filing a return, you must file as either Single, Married filing Jointly, Head of Household or Qualifying Widower.
Other Tax Credits
- The American Opportunity Tax Credit (AOTC)
For Americans who pay for college tuition this tax credit is available to them but is income restricted based on taxpayers adjusted gross income. The criteria you have to meet in order to qualify for the American Opportunity Credit are as follows. The student must be pursuing a degree or certificate while enrolled at least half-time for one or more academic periods. The student cannot have completed four years of post-secondary education at the beginning of tax year.
- The Lifetime Learning Credit
With the Lifetime Learning Credit, you do not have to meet the same requirements as you do with the AOTC. You just need to take a single class for the purpose of professional development or personal enrichment. A taxpayer can claim up to $2,000 per eligible student per year for any and all years of post-secondary education or adult continuing education courses. Be mindful that the Lifetime Learning Credit is not refundable, meaning it cannot be paid to you as a refund as it simply decreases your tax liability.
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