Don't miss these 3 tax credits when you file this year
A tax credit is among the most satisfying benefits you can turn up when preparing your return.
Unlike a deduction, which decreases the income on which you’ll be taxed, a tax credit reduces your overall tax due. The result can mean hundreds of dollars knocked off your bill - or added to your refund.
“With a credit, you get a 100% benefit,” says Andrew King, vice president of tax policy and research at Goldman Sachs Ayco Personal Financial Management in Cohoes, New York. “It’s a full recoupment of taxes you’d otherwise have to pay.”
Some tax credits apply to a huge swath of the population, while others are specialized to incentivize specific economic activity. Before you file your return, here are some tax credits you may want to review.
1. EARNED INCOME TAX CREDIT
The earned income tax credit, or EITC, is one of the most common income tax breaks, designed to help lighten the burden for middle- and lower-income families.
For the 2021 tax year, 4 out of 5 filers claimed this tax credit, with an average benefit upward of $2,000. The total value those credits was approximately $64 billion, the IRS said.
Even better, the EITC is what is known as a “refundable” tax credit. That means if the credit amount is higher than your tax owed, the government will pay you the difference.
DO YOU QUALIFY?
As its name suggests, eligibility for the EITC mostly depends on your income, and you have to have worked to receive the credit. For the 2022 tax year, the income limits range from $16,480 to $59,187, depending on your filing status.
There are a few other requirements, including: - You can’t have more than $10,300 in investment income. - Everyone on your tax return has to have a valid Social Security number.
2. CHILD TAX CREDIT
If you’ve used the child tax credit, or CTC, in the past, it’s important to remember that this benefit for families with children has undergone some significant changes.
During the pandemic, the government temporarily increased the credit amount, providing thousands of dollars worth of additional relief to some families. But in 2022, the credit reverted to its previous levels. Taxpayers who saw a big refund last year thanks to the credit may be disappointed when they file this time around.
Still, the CTC can wipe out a considerable chunk of your tax bill. The benefit can reach $2,000 per qualifying child, and up to $1,500 of that is refundable. People with dependents who don’t qualify for the full credit can be eligible for a credit up to $500.
DO YOU QUALIFY?
Families with children under 17 are generally eligible for the child tax credit as long as their kids have valid Social Security numbers. However, the amount you can claim depends on your income.
The credit begins to phase out once your adjusted gross income exceeds $200,000, or $400,000 for those married filing jointly. At a certain income level, the benefit lapses entirely.
3. AMERICAN OPPORTUNITY CREDIT AND LIFETIME LEARNING CREDIT
The American opportunity credit and lifetime learning credit are two education-focused tax breaks that help people with expenses such as tuition. Both credits have a similar setup, but they are tailored toward different types of costs.
The American opportunity credit is targeted toward students pursuing formal degree programs. The lifetime learning credit, on the other hand, can be used for other types of training and education.
The partially refundable American opportunity credit is also more generous: Taxpayers can claim up to $2,500 per eligible student, including for expenses beyond tuition, such as course materials. With the nonrefundable lifetime learning credit, you can claim a total of $2,000 per tax return for tuition only, regardless of how many students would be eligible. You can’t claim both credits for one student.
DO YOU QUALIFY?
The eligibility criteria for these two education credits vary. For instance, the American opportunity credit can only be used for four years of post-secondary education, and eligible students have to be enrolled at least half time. The lifetime learning credit is broader, and can apply to graduate courses or vocational classes.
The credits do have basic eligibility requirements in common. Both share an income limit of $90,000 for single filers and $180,000 for married people filing jointly.