Tax time can result in big windfalls for consumers. The IRS puts the average refund in 2016 at $3,050. With a lot of money on the table, you want to ensure you receive the maximum amount possible. Tax credits are among the most valuable benefits because it results in a dollar for dollar reduction of your tax bill.
Refundable and Non-Refundable Tax Credits
Credits are either refundable or non-refundable, which can make a significant impact on a refund for filers with low tax obligations. A refundable credit allows you to receive money back even when your credit is higher than what you owe. For instance, if you owe $1,000 in taxes, but qualify for a tax credit of $2000, a refundable credit will give you the full $2,000.
Credits Versus Deductions
Tax deductions differ from tax credits, in that a deduction subtracts from earnings, lowering taxable income, and thus reducing what you owe the IRS. Tax credits, on the other hand, directly lower the amount of taxes due, making them more valuable than deductions.
The most popular categories for tax credits include investing in education or retirement, filing with dependents, or purchasing green technologies.
Tax Credits for Investments in Education or Retirement
American Opportunity Credit
During the first four years of college, you can receive a credit of up to $2,500 per student, for monies spent on activity fees, supplies, books, tuition, and equipment. Parents of students qualify for the credit if you claim the student as a dependent on your tax return.
The credit begins to phases out at higher income levels, based on your adjusted gross income or AGI. Single tax filers with an AGI higher than $90,000 and couples filing a joint return with AGI above $180,000 follow a reduced credit schedule.
You may choose the tuition and fees deduction or the American Opportunity Credit, but not both in the same year. The credit is refundable.
If your AGI is less than $62,000, the Saver’s credit is worth exploring because it rewards you for making contributions to an IRA, 401K, or other qualified retirement account. You receive a percentage of contributions ranging from 10 to 50%, as a tax credit. The percentage applies to the first $2,000 in contributions for single filers and the first $4,000 in contributions for joint filers.
To qualify for the tax credit, you must be over 18, not a full-time student, or claimed as a dependent on someone else’s tax return.
You can contribute pre-tax dollars to retirement accounts, lowering taxable income, and still receive the credit, doubling the tax benefit.
Lifetime Learning Credit
The Lifetime Learning Credit is easier to qualify for than the American Opportunity Credit. With no workload requirement, most classes taken at an accredited institution will qualify. You can receive a credit up to $2,000 as a reimbursement for tuition, supplies, equipment, books, and activity fees. Both graduate and undergraduate courses qualify provided they count towards a degree, professional certification, or improve job skills.
You can receive 20% of expenses, up to $2000. The credit includes income thresholds, which begin at $65,000 for single filers and $131,000 for joint filers. There is not a limit on the number of years you can claim the benefit.
Benefits for Tax Filers with Dependent Children
Earned Income Credit
The Earned Income Tax Credit (EITC) helps offset Social Security taxes for lower to moderate-income workers. The credit uses filing status, income, and household size to establish the credit amount. Income limits are lower for tax filers without dependents. The credit ranges from $510 if you do not have a qualifying child to a maximum of $6,318 if you have three or more qualifying dependents.
To receive the credit, you must have earned income. The amount begins phasing out as low as $15,010 for single filers and up to $53,930 for married couples filing jointly with three or more dependents. Qualifying income does not consider earnings from investments, capital gains, dividends, and other non-earned income.
The EITC is one of the few refundable tax credits.
Tax filers with an AGI of less than $203,540, may qualify for the adoption credit, with an income phase out between $203,540 and $243,540. The Adoption Credit can cover up to $13,570 of expenses incurred during the adoption process per child for both domestic and international adoptions.
Adopting a special needs child could allow you to receive the full credit, even if it is below the actual expenses. In some cases, you may receive the tax benefit even if the adoption fails.
Child and Dependent Care Credit
Daycare costs can add a significant amount to your monthly budget. The childcare tax credit can help with those costs. The credit provides a benefit between 20 and 35% of childcare costs. You must deduct any childcare expenses paid for with pre-tax funds, such as money from flexible spending accounts, before calculating the credit.
You can receive a maximum of $3,000 per year for one child and $6,000 for more than one child. The dependent must be 12 or under or unable to care for themselves, and you must also provide the taxpayer information for the child care provider. Typically, family members do not qualify as caregivers under the tax code.
Child Tax Credit
The child tax credit offers a benefit of up to $1,000 per child when you meet income thresholds. When AGI exceeds $110,000, the IRS reduces the amount of credit you receive. It is a refundable tax credit.
Tax Credits for Green Technology Investments
Plug-in Electric Drive Motor Vehicle Credit
Buying a plug-in electric vehicle can earn up to $7,500 in credits. The benefit only applies to new electric four-wheeled vehicles with a battery capacity of at least four-kilowatt hours.
The least amount of credit you will receive is $2,500. However, the amount depends on battery capacity. The more kilowatt hours the battery can last, the larger the credit.
Residential Energy Tax Credit
Improving the energy efficiency of your home can lead to valuable tax credits. You can receive up to 30% of the cost of solar water heaters, solar panels, and other solar energy systems.
Tax credits can increase a refund or reduce your tax liability, putting more money in your pocket when you file taxes this year.