Tax Credits Available to You THIS YEAR

Deductions lower your taxable income (thus your tax) while credits are a dollar-for-dollar rebate on your tax bill. Deductions are only worth the tax rate you fall under. For example, if you are in the 24% tax rate, then ever $1 of deductions is worth $0.24. Credits are subtracted dollar-for-dollar from your end tax liability. So, while it’s important to ensure you aren’t missing any deductions, it’s even more beneficial to ensure that you are taking all of the credits you qualify for. Here are just a few of the more popular credits that are available to individuals on their personal tax returns. 

Child Tax Credit 

Can you put a price on the love of your kid? Of course not! But the IRS can (well, sort of). The IRS will give you a credit against your tax liability of $2,000 per qualifying dependent child (16 years old or younger at year end). This credit is known as the Child Tax Credit. Almost takes care of their food bill for a month! ;) 

You may also qualify for the Child and Dependent Care Tax Credit of up $3,000 per kiddo ($6k for 2 or more kids).

This credit is partially refundable - up to $1,400 per qualifying child. 

Child and Dependent Care Credit

The Child and Dependent Care Credit is a nonrefundable tax credit designed to make it easier for working parents to afford child care. This credit can be as much as $3,000 for one child, or up to $6,000 for 2 or more kids. 

There are qualifications that must be met in order to take this credit: 

• You must have earned income for the tax year. If you are filing a joint return, both taxpayer and spouse must have earned income unless one is disabled or a full-time student.
• If you’re married, you have to file jointly to take this credit.
• The child for which you are paying for care is under the age of 13, or a disabled dependent of any age. 
• The care provider cannot be someone who can be claimed as a dependent 
• The purpose of paying these child care expenses was to allow you and your spouse to work, look for work, or go to school (again, unless one spouse is disabled. In that case this requirement doesn’t apply to that spouse) Again, if you were disabled, this requirement doesn't apply.

Once you determine that you qualify, you don’t automatically get the full $3,000 or $6,000. The credit is calculated as a percentage based on your adjusted gross income. 

• If your income is less than $15,000, you qualify for the maximum 35%
• The percentage then drops by 1% for every $2,000 of income over $15,000.
• The AGI phaseout stops at $43,000 which qualifies you for the lowest 20% credit. 
• There is no upper income limit for this credit

American Opportunity Credit/ Lifetime Learning Credit (higher education credits)

College sure can be expensive, right? Whether it’s you, your spouse or one of your almost-grown kids heading off to college, make sure you take advantage of the education credits that you may qualify for. 

The American Opportunity Tax Credit (AOTC) can get you up to $4,000 back, but is the toughest of the credits to qualify for. There is also the Lifetime Learning Credit (LLC) which has far fewer limitations and can still get you up to $2,000 per year on your return. You’ll want to consult with our tax advisor to determine which of these credits you might qualify for.

The Earned Income Credit 

The Earned Income Credit (EIC) was specifically created to benefit low income working people. It comes with a lot of due-diligence requirements, but can be a huge credit to some taxpayers. 

Unfortunately, the EIC is also a red-flag for IRS audits, so it is so important that you keep accurate records and only take the credit you legitimately qualify for. 

The Retirement Savings Contributions Credit (AKA The Saver's Credit)

The Saver’s Credit is the informal name of the Retirement Savings Contributions Credit which is designed to encourage and reward Americans with lower incomes to save money for retirement. 

By contributing to a tax-advantaged retirement account such as a traditional or Roth IRA, 401(k), 403(b), Thrift Savings, SEP-IRA, or 457, you could qualify for this nonrefundable credit depending on your adjusted gross income. 

The Saver's Credit can be as much as $1,000 per taxpayer and is calculated as a percentage of your retirement contribution; either 10%, 20%, or 50% of as much as $2,000 in retirement savings contributions for those who qualify. Married couples can increase their credit if both spouses make contributions. 

Want to learn more about these credits? Have questions about other credits? Join our January training event on our Facebook business page, Lippa Beers & Associates P.C. on Wednesday January 22, 2020. This training is part of our monthly Facebook training series and it is completely free! RSVP today.