Tax Credits Everyone Should Know About
Americans cost themselves thousands of dollars each year by not claiming very helpful tax credits that they are entitled to. These credits can either be ‘Non-refundable’ (NRF), which are used only to offset taxes you owe, if any, or ‘Refundable’ (RF) that can be received as a refund even if no tax is owed. Dr. Ahmed Ebrahim, associate professor of accounting at Fairfield University’s Dolan School of Business, shares seven tax credits that can really make a difference:
- Child Tax Credit (CTC):
A $1,000 Non-refundable credit for each qualifying child under 17 years old. It is phased out (reduced gradually to zero) for high-income taxpayers depending on their filing statues. For example, for married taxpayers filing jointly, it starts to phase out at Adjusted Gross Income (AGI) of $110,000, and is totally gone at $130,000. Part of the unused CTC can be refunded to some low-income taxpayers depending on the number of qualifying children they are claiming.
- Earned Income Credit (EIC):
A significant Refundable credit for taxpayers with earned income depending on their income level, filing statues, and number of their qualifying children. This year, married filing jointly with Adjusted Gross Income up to $52,400 can claim EIC up to $6,143. To claim this credit, your investment income cannot be over $3,350.
- Credits for College Tuition:
There are two credits for college tuition paid by either taxpayer’s own money or using student loans. The American Opportunity Credit (AOC) is the generous one for the first four years of undergraduate degree. A maximum tuition of $4,000 gives a maximum credit of $2,500 with $1,000 of it refundable. It is phased out for married filing jointly between Adjusted Gross Income of $160,000 and $180,000 and lower levels for other filing status.
The less generous Life Learning Credit (LLC) can be claimed for tuition paid for any degree or non-matriculated courses. It is 20% of the first $10,000 of tuition with maximum $2,000. It is also phased out for married filing jointly with Adjusted Gross Income between $104,000 and $124,000 and lower levels for other filing status.
- Residential Energy Credits:
Qualified energy efficient home improvements (i.e., exterior windows, doors, insulations, furnace, or water boiler) can qualify the taxpayer for up to $500 Non-refundable tax credit. This credit is more generous (30% of the qualified expenses) in cases of other energy-saving investments like solar panels.
- Foreign Tax Credit:
Taxpayers with income from a foreign country who paid tax on that income to the foreign country can claim a credit in their U.S. tax return for taxes paid to the foreign country. This credit is not a dollar-for-dollar credit and can be claimed by filing Form 1116.
- Credit for Qualified Retirement Savings Contributions:
This Non-refundable credit can be claimed by low-income taxpayers who make contributions to retirement accounts. Married filing jointly taxpayers with income less than $60,000 can claim credit up to $2,000 by filing Form 8880.
- State-to-State Credit:
Often times, taxpayers who live in one state (i.e., Connecticut) but work in another state (i.e., New York) forget to claim a credit in the tax return of the residency state for taxes paid to the work state. Make sure you check the form used by your residency state to claim this credit.