Tax Credits You May Qualify For:
Everything You Need to Know
There are many tax credits made available by the government to reduce your tax liability and increase your refund.
Tax credits are separate from tax deductions, and are granted for specific actions or behavior. These include things such as upgrading to energy efficient appliances, reducing the cost for home owners, or assisting families with children.
By not taking advantage of tax credits you are eligible for, then you’re just leaving money sitting on the table. No one should pay more taxes than they have to, so let’s get started and find which tax credits you may qualify for.
What is a tax credit?
A tax credit is a specific amount of money that is subtracted from the taxes owed, for those who qualify.
Tax credits reduce the actual amount of taxes owed, dollar-for-dollar, based on the value of the tax credit. The value of the tax credit is the same for all individuals, and not based on income level.
Let’s say your tax liability is $10,000 and you qualify for a tax credit of $2,500. That tax credit automatically reduces your tax liability by that amount, so you would only owe $7,500 instead.
Tax Credits vs Tax Deductions
A tax credit lowers your actual tax bill by the specified amount of the credit you qualify for.
Tax deductions make your taxable income lower by subtracting from your adjusted gross income (AGI), making your taxable income lower. The lower your taxable income, the lower your tax bill is.
Tax credits can significantly lower your tax bill, or increase your refund even more than tax deductions, as explained in the table below.
In this example, a $5,000 tax credit will reduce your tax bill by $3,900 more than a $5,000 tax deduction does. That’s a big chunk of change, and why it’s so important you get the tax credits you’re eligible for!
We have an additional article specifically on tax deductions here.
Types of Tax Credits
There are three basic kinds of tax credits: nonrefundable, refundable and partially refundable. We’ll go over what each one means.
Nonrefundable tax credits apply towards your tax liability until it reaches $0. This means that if you lower your taxes due through credits or deductions, then any additional credits will not apply, and you receive no further benefit. Examples of nonrefundable tax credits are the Child and Dependent Care Credit, the Saver’s Tax Credit for funding retirement accounts, and the Mortgage Interest Credit.
Refundable tax credits keep applying even after you have $0 in taxes due. This means that if you owe no taxes, then the credit will pay you in full as a refund! This is the most beneficial type of tax credit. Examples include the Earned Income Tax Credit and the Premium Tax Credit.
Partially Refundable tax credits reduce your tax liability, and if you reduce your taxes due to $0, then the remainder of the tax credit amount is refunded to you. Examples include the Child Tax Credit and the American Opportunity Tax Credit. To put it plainly, if you have a tax liability of $1,000 and are due $1,400 from the Child Tax Credit, then the $400 difference is refunded to you.
What Tax Credits Do I Qualify For?
Now that you know what tax credits are, and how much they can benefit you, here’s the list of available credits, and what the requirements are.
Tax Credits for Families
Earned Income Tax Credit
The Earned Income Tax Credit (EIC or EITC) is a refundable tax credit that can grant you from $529 to $6,557 depending on the number of children you can claim as dependents. Your income must also be below a certain amount to qualify, illustrated in the table below.
1 out of 5 qualifying tax payers don’t claim the Earned Income Tax Credit, so make sure you check if you qualify.
|# of Children||Maximum Income (Single)||Maximum Income (Joint Filing)||EITC Amount|
You must have earned at least $1 of income during the calendar year.
You must be between the ages of 25 and 65.
Your 2019 income from investments must be $3,600 or less.
Your child has to be 19 or younger at the end of the year, or 24 or younger if the child is a student.
The child can be your son, daughter, adopted child, stepchild, foster child or grandchild, brother, sister, half-brother or half-sister, stepbrother or stepsister or any of their children.
The child must have lived with you or your spouse for at least 6 months of the year.
Special note: You can claim the EITC if you are single with no children or dependents, as long as your adjusted gross income is below the maximum limit.
Child and Dependent Care Credit
The Child and Dependent Care Credit provides 20% to 35% for child care or similar costs.
The percentage is up to $3,000 for a single dependent, and up to $6,000 in costs for 2 or more dependents.
The child must be under 12 years old or younger to qualify.
You must have earned income (money earned from a job) to qualify.
Special note: The costs you can claim the credit for don’t have to be specific for direct child care, but can also include costs for household items such as cooking or cleaning.
Child Tax Credit and Credit for Other Dependents
The Child Tax Credit is worth up to $2,000 per qualifying child and $500 per qualifying dependent.
Your adjusted gross income must be below $200,000 if filing single, or $400,000 if filing jointly.
The child must be 16 years old or younger to qualify.
You must have provided at least half of the child’s support during the year.
Similar to the Earned Income Tax Credit, your child must have lived with you at least 6 months of the year.
The Adoption Credit provides up to $14,080 for out-of-pocket expenses related to adopting a child.
If the child you adopted is a “special needs” child, you can claim the full amount of the credit, regardless of out-of-pocket expense.
Your adjusted gross income must be less than $251,160 to claim this credit.
Credit for the Elderly or Disabled
This credit provides between $3,750 and $7,500 for tax payers over age 65 or retired on permanent and total disability and received taxable disability income.
You can claim the credit if you are under age 65 and retired on total and permanent disability.
If you are Single or Head of Household, your adjust gross income must be $17,500 or less.
If you are Married and Filing a Separate Return, your adjusted gross income must be $12,500 or less.
If you are Married and Filing a Joint Return, and only one spouse qualifies, your adjust gross income must be $20,000 or less.
If you are Married and Filing a Joint Return and both qualify, your adjusted gross income must be $25,000 or less.
Income and Savings Credits
The Saver’s Credit can be taken for your contributions to a traditional or Roth IRA; your 401(k), SIMPLE IRA, SARSEP, 403(b), 501(c)(18) or governmental 457(b) plan; and your voluntary after-tax employee contributions to your qualified retirement and 403(b) plans.
This credit stacks on top of other tax benefits you receive for contributing to a retirement account.
Depending on your adjusted gross income, the amount of the credit is from 10% to 50% of your account contributions.
|Credit Amount||Single Filer AGI||Head of Household AGI||Joint Filer AGI|
$19,250 or less
$28,875 or less
$38,500 or less
To put this in perspective, if you are a single filer with an adjusted gross income of $19,250 or less, and contributed $1,000 towards a retirement account, you’ll receive a tax credit of 50% of your contribution, or $500.
You must be 18 or older to qualify.
You cannot be a full-time student.
You cannot be claimed as a dependent on someone else’s tax return.
Foreign Tax Credit
If you are an American citizen that pays income tax to a foreign government, that tax can be claimed as a credit on your income tax.
You can qualify if you answer yes to these 4 questions:
- Is the tax imposed on you?
- Did you pay or accrue the tax?
- Is the tax a legal and actual foreign tax liability?
- Is the tax an income tax or a tax in lieu of an income tax?
Excess Social Security Tax Withheld Credit
There’s a limit for how much income an individual should have withheld for Social Security tax.
For 2019, that limit is $8239.80.
Check your W-2 in box 4 for the amounts entered.
If the amount is more than the limit, you can claim that excess withheld as a tax credit.
Credit for Tax on Undistributed Capital Gain
If you are a shareholder of mutual funds, and that mutual fund kept some of its’ capital gains and paid a tax on them, you’ll receive a form from the company.
This is the Form 2439: Notice to Shareholders of Undistributed Long-Term Capital Gains.
Usually a mutual fund will distribute all its’ capital gains to the shareholders, but if you receive that form, you can claim a credit for the taxes they pay.
Credit for Prior Year Minimum Tax
The Alternative Minimum Tax (AMT) impacts just 0.1 percent of households overall. It was designed to prevent high-income taxpayers from avoiding the ordinary individual income tax system.
The rules require high income earners to calculate their taxes twice; once under the normal income tax rules and once under the AMT rules. Whichever is higher, the tax payer then needs to pay.
The AMT rules only apply to income over a specified adjusted gross income amount. The exemption for 2019 is $71,700 for Single Filers and $111,700 for Married Joint Filers.
If you paid AMT in one or more previous years, but didn’t owe AMT for the tax year, you may be eligible to take a credit for the prior year minimum tax paid.
It’s a bit complicated, but good tax software like TurboTax can easily walk you right through it to find out if you qualify.
Credit to Holders of Tax Credit Bonds
Some bonds issued under IRC Section 54A qualify for a tax credit. These bonds have a tax credit instead of receiving periodic interest payments from the bonds. The credit is not available for bonds issued after December 31, 2017.
This credit can be claimed for the following bonds:
Clean renewable energy bond (CREB)
New clean renewable energy bond (NCREB)
Qualified energy conservation bond (QECB)
Qualified zone academy bond (QZAB)
Qualified school construction bond (QSCB)
Build America bond (BAB) (Note: BAB holders receive taxable interest along with being allowed a credit.)
Residential Energy Efficient Property Credit
Certain home upgrades are eligible for a tax credit.
Solar, wind, geothermal, and fuel cell technology are all eligible. Energy Star products that boast 30% less energy usage, and heat pumps that meet Energy Star guidelines also qualify for the tax credit.
If you installed energy efficient upgrades or appliances, you can claim 30% of the cost, which includes installation fees.
To qualify, the upgrades must be for a residence located in the United States.
Premium Tax Credit (Affordable Care Act)
You may be eligible for this credit if your health insurance coverage was purchased through the Health Insurance Marketplace, also known as the Affordable Care Act. The tax credit is based on the income estimate and household information when you submitted your Marketplace application.
Your income must be between 100% to 400% of the federal poverty line amount for the size of your family.
A Single Filer would need to earn between $12,490 and $49,960 in 2019 to qualify.
A family of four would need earnings between $25,750 and $103,000 to qualify.
This credit can only be taken for coverage that originated through the Marketplace.
You also can’t be eligible for health coverage through an employer or government health insurance plan.
You cannot qualify if you are claimed as a dependent by another person.
You must either file as Single or a Married Joint Filing tax return.
Health Coverage Tax Credit
If you are between the ages of 55 and 64 years old and your benefit pension was taken over by the Pension Benefit Guaranty Corporation (PBGC), or if you are eligible for Trade Adjustment Assistance (TAA) allowances because of a qualifying job loss, then you may qualify for the Health Coverage Tax Credit.
If you paid 100% of your health insurance premiums, then you can claim this credit on your 2019 federal income tax return. The program expires after this year.
American Opportunity Credit
This credit assists taxpaying students or their parents by reducing the cost of attending college.
It provides for 100% of the first $2,000 of qualified expenses, then 25% of the expenses in excess of $2,000. The maximum credit per student you can receive in a year is $2,500.
Qualified expenses consist of things like Books, Supplies, Equipment and other materials, or things that relate to the program of study.
A Single Filer must have an adjusted gross income less than $90,000 to qualify.
Joint Filers must have an adjusted gross income less than $180,000 to qualify.
Lifetime Learning Credit
This credit can be applied for post-secondary school costs including tuition, fees and any books or supplies you are required to purchase directly from the school for enrollment.
You can claim 20% of those costs up to $10,000 or a maximum credit of $2,000.
A Single Filer must have an adjusted gross income of $58,000 or less to qualify.
Joint Filers must have an adjusted gross income of $116,000 or less to qualify.
Get Your Maximum Tax Refund
To get your maximum tax refund, you need to know what tax credits and tax deductions you are eligible for. Filing your taxes only to realize that you forgot certain credits or deductions is like throwing money away, and that’s never a good feeling.
Tax laws are complicated, comprising over 2,600 pages of the IRS tax code. Let the tax experts do the work for you!
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