Tax season has arrived, and if you would like to lower your bill to the government this year, it is important to understand what tax credits you can claim.
First, tax credits shouldn’t be confused with tax deductions.
A tax credit will directly offset the tax you owe, while a deduction reduces how much income is taxable.
As a simple example, a $500 tax credit will wipe out $500 in taxes due.
On the other hand, a tax deduction depends on your tax bracket. For those in the 22% tax bracket, a $1,000 deduction will save $220 in taxes.
Some credits are refundable. This means they will result in a refund if the amount of the credit exceeds the amount of taxes owed.
Other credits are nonrefundable. They will wipe out your tax bill but won’t result in a refund.
Tax credits are more valuable, so the government places income limits and other restrictions on who can claim them. These restrictions vary for each credit.
Most common credits fall into the following categories: tax credits for college, tax credits for families and tax credits for low-income households.
College tax credits
There are two tax credits for those paying college tuition. The more worthwhile of the two is the American Opportunity tax credit.
Parents of dependent students, as well as independent students, may be eligible for a $2,500 per student credit for the first four years of undergraduate education. Up to $1,000 of that is refundable.
To claim the credit, students must be enrolled at least half time for one academic period, be pursuing a degree or other recognized education credential, and not have previously claimed an American Opportunity credit or the former Hope Credit for more than four tax years.
Eligible expenses include tuition, fees, and expenses that are required for attendance in class, such as books.
The other tax credit for college tuition is the Lifetime Learning credit. The lifetime learning credit is equal to 20% of qualified education expenses, up to a $2,000 credit per year.
There is no limit to how many years someone can claim a lifetime learning credit, and classes don’t have to be part of a degree program.
Child tax credit
Next on the list is the child tax credit, which is now $3,000 for children ages 6-17 and $3,600 for children younger than age 6.
Also, instead of being partially refundable as it has been in the past, the child tax credit is now fully refundable.
Last on the list is the earned income tax credit. The earned income tax is a tax credit for workers with low to moderate income.
Eligibility for the tax credit is based on various factors including family size, filing status, and income.
Also, to be eligible for the earned income tax credit, taxpayers are also limited to how much in investment income they earn in a year.
If the earned income tax credit exceeds the amount of taxes owed, it will result in a tax refund.