Tax season is upon us, and if you want to reduce how much you pay the government, you need to understand which tax credits you can claim.
People shouldn’t feel embarrassed if they don’t understand tax credits.
“This is an area of confusion,” says Eric Bronnenkant, head of tax for online financial advisory firm Betterment. “Before I was involved in taxes, I was confused about it.”
[READ: 22 Legal Secrets to Reducing Your Taxes]
Credits are an efficient way to reduce a tax bill, but they can have complex rules. For instance, they may only be available to those with certain incomes or apply only to taxpayers who have made specific purchases during the year.
Keep reading to learn more about how tax credits differ from deductions and which federal tax credits apply to your situation.
What Is a Tax Credit?
Tax credits shouldn’t be confused with tax deductions.
“A tax credit is a dollar-for-dollar reduction in one’s tax liability,” says Logan Allec, CPA and owner of tax relief company Choice Tax Relief. “A tax deduction reduces your taxable income.”
For instance, a $1,000 tax credit will wipe out $1,000 in taxes due. Meanwhile, the value of a tax deduction depends on your tax bracket. For those in the 22% tax bracket, for instance, a $1,000 deduction will save $220 in taxes.
[Filing 2024 Taxes: What’s My Tax Bracket?]
“In general, a tax credit is more valuable than a tax deduction,” Allec says.
Some credits are refundable, which means they will result in a refund if the amount of the credit exceeds the amount of taxes owed. Other credits are nonrefundable and can wipe out a taxpayer’s bill, but they won’t result in a tax refund.
Because credits are so valuable, the government usually places income limits or other restrictions on who can claim them. These restrictions vary for each credit. What’s more, both states and the federal government may offer credits for similar expenses, but each has its own eligibility criteria.
Find Your Tax Credits
Tax law changes and major life milestones — such as the birth of a child or enrolling in college — may make a person eligible for new credits.
“We issue tax organizers to all of our clients,” says Guy Finocchiaro, a CPA in Uniondale, New York. This document asks people about their sources of income, any changes from the previous year and other life events. “It gives us a complete picture of what their situation is,” he says.
If you complete your own tax return, many tax software programs will walk users through a questionnaire that asks similar questions to determine what tax forms — and credits — may apply.
Overall, the most common credits fall into the following categories: tax credits for college, tax credits for families, tax credits for income-eligible households and tax credits for investments.
Tax credits you may qualify for include the following:
— American opportunity credit.
— Lifetime learning credit.
— Child tax credit.
— Child and dependent care tax credit.
— Adoption tax credit.
— Earned income tax credit.
— Premium tax credit.
— Energy efficient home improvement/clean energy credits.
— Foreign tax credit.
— Retirement savings contribution credit.
Keep reading to learn more about these credits and who can claim them.
Tax Credits for College
American opportunity credit. Those paying college tuition have two tax credit options. The more lucrative 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. Of that, 40% — up to $1,000 — 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 income ranges at which the credit phases out are between $80,000 and $90,000 for single filers and $160,000 to $180,000 for joint filers.
Lifetime learning credit. The lifetime learning credit is equal to 20% of qualified education expenses, up to a $2,000 credit per year. The income limits are the same as the American opportunity credit. There is no cap on how many years someone can receive a lifetime learning credit, and classes don’t have to be part of a degree program.
Tax Credits for Families
Child tax credit. “This is probably one of the common (credits),” Bronnenkant says. It offers a tax credit to income-eligible families with children ages 16 and under. The credit is worth $2,000, of which $1,600 may be refundable to qualifying parents.
To receive a child tax credit, parents must provide more than half of the support for the child being claimed. Married couples filing jointly can have incomes as high as $400,000 before their credit is reduced, and other taxpayers can have incomes of up to $200,000.
Child and dependent care tax credit. The child and dependent care tax credit is available to those who pay for child care so they can work. “That’s the key,” Allec says. “You need earned income.”
Qualifying expenses include care for children younger than age 13, spouses who are physically or mentally incapable of self-care or other qualifying individuals who are incapable of self-care. In all cases, the person receiving care must live with the taxpayer for more than half the year.
The maximum credit is calculated as 35% of allowable expenses , up to $3000 for a single child and $6,000 in for two or more children. However, once a taxpayer’s adjusted gross income reaches $15,000, the credit percentage declines until it reaches 20% for those earning $43,000 or more a year.
Adoption credit. This credit can help reimburse parents for legal fees and other costs associated with adoption. The maximum credit is $15,950 per child for tax year 2023. While the credit is not refundable, any unused portion can be carried forward for up to five years.
You’ll need a modified adjusted gross income of $239,230 or less in 2023 to receive the full credit. Above that, the tax benefits are reduced and then eliminated if your income hits $279,230.
Tax Credits for Income-Eligible Households
Earned income tax credit. The earned income tax credit can be lucrative for those who qualify. “It could be several thousand dollars,” Finocchiaro says. “That’s why it’s highly audited.”
The maximum credit for the 2023 tax year is $7,430 for a household with three or more qualifying children. However, for those with no qualifying children, the maximum credit is only $600.
“The credit is very much geared toward those with dependents,” Allec says. Taxpayers without children also must have very low incomes to qualify.
Income limits range from $17,640 for a single taxpayer with no children to $63,398 for a married couple filing jointly with three or more children. To be eligible for the earned income tax credit, taxpayers are also limited to no more than $11,000 in investment income for the year.
Premium tax credit. Many people receive this credit throughout the year in the form of a health insurance premium subsidy. Created by the Affordable Care Act, it is offered to income-eligible households buying insurance coverage through the government’s health insurance marketplace. The credit is refundable, and the amount each household receives depends on their income and the price of health insurance in their area.
At tax time, people need to file returns and include the amounts they received in subsidies. If someone’s income has gone up significantly in the previous year, it could result in a significant tax bill.
“If people lied (about their income) when they filled out their applications, they are going to have to pay back all those credits,” Logan says.
Tax Credits for Investments
Energy efficient home improvement/clean energy tax credits. Those investing in their homes with energy-efficient upgrades can take advantage of enhanced tax credits.
The energy efficient home improvement credit is equal to 30% of the cost of qualified improvements such as energy efficient doors and windows. The credit can be claimed annually with a cap of $1,200 per year for energy property expenses and energy efficient home improvements. There are limits within that $1,200 regarding how much can be claimed for doors, windows and home energy audits.
There is also a $2,000 credit available annually for qualified heat pumps, biomass stoves and biomass boilers. There is no lifetime limit on the energy efficient home improvement credit, and it is currently slated to be available through 2033.
There is also a residential clean energy credit for those making clean energy improvements to their home, such as installing qualified solar electric, geothermal heat and biomass fuel equipment. The credit is equal to 30% of the cost of property put into service in 2022 through 2032.
Foreign tax credit. The foreign tax credit allows taxpayers to receive a credit for foreign taxes they pay on income that’s also subject to U.S. income tax.
“American citizens living abroad and working can get a foreign tax credit for (foreign taxes) paid on their income,” Finocchiaro says.
Even middle-class families may be eligible to receive this credit if they have invested in foreign mutual funds. Dividends from those funds may be subject to foreign tax, and U.S. taxpayers shouldn’t overlook the chance to receive a credit for those payments.
“Actually, quite a few people claim that one,” Bronnenkant says. If you have paid any foreign tax on investments, it should be listed on the 1099 tax form you receive from your brokerage.
Retirement savings contribution credit. Also known as the saver’s credit, this credit is available to independent taxpayers who are 18 or older but not full-time students. It provides a tax credit of 10%, 20% or 50% of contributions to an IRA, employer-sponsored retirement plan or ABLE account.
To receive the maximum credit, married couples filing jointly must have an adjusted gross income of no more than $43,500 in 2023. Above that, the credit drops to 20% of contributions for couples earning up to $47,500 and 10% for those with incomes between $47,501 and $73,000.
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10 Tax Credits You May Qualify for This Year originally appeared on usnews.com
Update 01/17/24: This story was published at an earlier date and has been updated with new information.
