While all tax software are a shortcut through which you can find any eligible tax credits and deductions, it’s preferable to file your tax return already knowing which tax breaks you qualify for.
Credits are a very effective way to reduce your tax burden, but sometimes they can be misunderstood, warn experts in the field. Each one of these tax credits has its own income threshold, meaning not every tax credit will be available to every household.
Also, nobody wants to pay more than they are required to — from the student loan interest deduction to expanded child tax credit and saver’s credit, there are many tax credits you may be eligible for that maximize your tax refund or cut down your tax bill.
Before actually providing all the details, you need to know whether or not you qualify for some tax credits. It’s important to clarify some points.
What’s a Tax Credit?
A tax credit isn’t the same as a tax deduction. Even though a tax credit reduces the amount of tax owed, a deduction reduces the amount of taxable income. In other words, a tax credit involves a greater deal of money than a deduction — money that you won’t have to give back if you qualify for certain tax credits.
For example, a $1,500 tax credit will wipe out $1,500 in taxes owed. The value of a tax deduction, however, is calculated based on your tax bracket. For those taxed at 22%, a $1,500 deduction will save $330 in taxes.
Some credits are refundable — provided that you’re qualifying for a certain tax credit, you’ll be refunded if the credit amount exceeds the amount of taxes due. Other credits are nonrefundable, though, and while they can wipe out a tax bill, they don’t result in a tax refund.
Since credits are quite valuable, the government has been placing some restrictions — such as income limits — on who is eligible to claim them. Note that these restrictions may differ depending on the credit. Furthermore, while both the federal government and the states may provide credits for similar expenses, each has its own eligibility rules.
The most common types of credits include tax credits for families, tax credits for investments, tax credits for college, and tax credits for income-eligible households.
That being said, here are 10 tax credits and their eligibility requirements!
Tax Credits for Families
Child Tax Credit. The child tax credit has been raised as of 2021 from $2,000 to $3,000 for children aged 6 to 17, and $3,600 for children under the age of 6. Eligibility for this credit was also expanded, and the government made monthly payments equivalent to half a household’s expected credit during the last months of 2021.
Parents who got advance payments in 2021 will be required to file a tax return in order to balance out the amount owed with the payments they received. Those parents who qualify for the full credit will have the remaining amount added to their tax return. If some people got advance payments but don’t actually qualify for the credit, they may keep the money if they have certain incomes.
As of 2022, the child tax credit goes back to its previous level ($2,000) for each child who’s under the age of 17 who lives with a taxpayer for more than 6 months per year. Married couples who file taxes jointly can be eligible for this tax credit as long as their income doesn’t exceed the $40,000 threshold. Also, other taxpayers can also receive the credit if they earn up to $200,000.
Child and Dependent Care Tax Credit. This credit was also increased in 2021. The maximum credit available is 35% of $3,000 in qualified expenses or $6,000 in qualified expenses for two or more kids. Note that the maximum credit can be increased to 50% if your adjusted gross income (AGI) is below $125,000.
Allowable expenses include care for spouses who are mentally or physically incapable of self-care, kids under the age of 13, or other individuals who are unable to care for themselves. In all cases, the one who receives care must live with the taxpayer for more than 6 months per year.
Adoption Credit. This credit can help parents get reimbursed for their legal fees and other adoption-related expenses. For adoptions made in 2022, the adoption tax credit can be up to $14,890 per child. In order to receive it, you must have an AGI of $216,660 or less. After this limit, your tax benefits are diminished and eliminated once your income exceeds $256,660.
Tax Credits for Income-Eligible Households
Earned Income Tax Credit. This one can be very valuable for those who are eligible for it. It tends to be overlooked, and one reason for that would be that it’s only available to those taxpayers who earn low and moderate incomes, which limits who can apply for it.
The maximum credit for 2022 is $6,935, but it can vary depending on the number of children you have and your income. Of course, there are some income limits that range from $21,430 — for taxpayers who don’t have children — to $57,414 for married couples who file taxes jointly and have three or more kids.
And there’s another important thing: to qualify for this tax credit, taxpayers must not have more than $10,000 in investment profit for the year. For those who are eligible, it’s a refundable tax credit that could provide thousands of dollars to low-income families.
Premium Tax Credit. Many taxpayers get this tax credit — which is a kind of health insurance subsidy — throughout the year. Provided by the Affordable Care Act, it’s meant to help income-eligible households who buy insurance coverage through the official health insurance marketplace run by the federal government.
The credit is refundable, and the amount received by each household is determined by their income and the health insurance price in their area. Those taxpayers who received this tax credit must mention it when they file a tax return. If a taxpayer’s income has increased significantly during the previous year, they may be required to repay some money or even all of the credit.
Recovery Rebate Credit. To assist American households during the coronavirus pandemic, the government issued several sets of stimulus checks (formally known as economic impact payments). Those who had qualified but hadn’t gotten their recovery rebate credit could have claimed their stimulus checks on their 2021 tax return.
However, only those who did not get the third stimulus payment of $1,400 can claim the rebate. If you didn’t get the first or second stimulus payments that were both issued in 2020, you must file or amend your 2020 tax return.
The third stimulus payment was limited to those married couples who file taxes jointly and earn less than $160,000. Heads of households that have an income of less than $120,000 can also claim this recovery rebate credit.
Tax Credits for Investments
Foreign Tax Credit. This one allows taxpayers to get a credit for foreign taxes on income that’s also subject to US income tax. Dividends from those foreign mutual funds may be subject to foreign tax, and as a US taxpayer, you shouldn’t miss out on the chance to get a tax credit for those payments. If you’ve paid any foreign taxes on income, the 1099 tax form you get from your brokerage should show it.
Retirement Savings Contribution Credit. Commonly known as the saver’s credit, this one is meant to help independent taxpayers aged 18 and older who aren’t full-time students. It can offer 10%, 20%, or even 50% of contributions made to an IRA, ABLE account, or employer-sponsored retirement plan. Eligible individuals can receive a credit of up to $1,000 for making these kinds of contributions.
Tax Credits for College
American Opportunity Credit. Those who are paying for college can apply for two types of tax credits. The most valuable is the American opportunity credit. Both independent students and parents of dependent students can qualify for a $2,500 credit for the first 4 years of undergraduate education. Up to $1,000 of that amount is refundable.
In order to get this credit, students must be pursuing a degree or other education-related credential, be enrolled at least part-time for one academic period and have not claimed this tax credit for more than 4 tax years in the past. Allowable expenses include tuition costs and other essential costs for class attendance (such as books).
Married couples who file taxes jointly can claim the credit if their AGI is less than $180,000; for those in other filing categories, the income limit is $90,000.
Lifetime Learning Credit. This tax credit is equal to 20% of allowable education expenses, up to $2,000 each year. In order to qualify for it, your AGI should be less than $138,000 as a married couple who files taxes jointly or less than $69,000 as a single filer. There are no limits on how many years you can receive it, and classes don’t have to be part of a degree program.
Did you like this article? Here’s one you may also enjoy: Yes, You Can Avoid Some Taxes With These 6 Solutions!