Tax Credits That Can Reduce Your Taxes

Credit often causes smiles. Be it a good credit history or taking credit for doing something good, the word ‘credit’ usually has a positive connotation to it. This is especially true with tax credits. They help you reduce the taxes you owe. A tax credit is almost always better than a tax deduction because it reduces your taxes, dollar for dollar (i.e. – $5 in tax credits reduce your taxes by $5), while tax deductions only reduce your income and then you compute the tax owed from the reduced income (i.e. – $5 in tax deductions only reduce your taxes by $1 if you are in the 20% tax bracket). Dylan and Margaret were aware of this, so they wanted to optimally capitalize on this.

Some credits are also refundable. That means even if you owe no tax, you may still get a refund check. And some are non-refundable, which only reduces your income tax down to zero. The Adoption Tax Credit is one that is non-refundable. You can get approximately $14,300 (2021) in tax credits, but it will not give you a refund if your taxes are less than the credit. So, it’s better to receive a refundable credit, but ANY credit is good and almost always better than tax deductions.

Here are some other tax credits you shouldn’t overlook when filing your federal tax return:

1. The Earned Income Tax Credit (EITC)

This is a refundable credit for people who work, but don’t report earning much money. It can boost your refund by as much as $6,728 (2021 amounts). You may be eligible for the credit based on the amount of your income, your filing status and the number of children in your family. Single workers with no dependents may also qualify for EITC. Remember, if you are audited and it is determined that you are not eligible for the Earned Income Credit that you claimed, you could be barred from applying for Earned Income Credit for ten (10) years. This penalty comes because some people tried to apply for the tax credit, but the returns were fraudulent.

Now tax preparers must ask more questions and see some proof from taxpayers, such as birth certificates, medical records, social security cards, school records, divorce decree or some other form of proof that the dependent is living with you, and you are able to take the dependent on your tax return. Visit IRS.gov and use the EITC Assistant tool to see if you can claim this credit. For more see Publication 596, Earned Income Credit.

2. The Child Tax Credit (CTC) and Dependent Care Credit (DCC)

This can help you offset the cost of daycare or day camp for children under age 13. You may also be able to claim it for costs paid to care for a disabled spouse or non-child dependent of any age. For details, see Publication 503, Child and Dependent Care Expenses. This type of credit can reduce the taxes you pay by as much as $3,600 for each qualified child you claim on your tax return. The child must be under age 17 in 2021 and meet other requirements. Use the Interactive Tax Assistant tool on IRS.gov to see if you can claim the credit. See Publication 972, Child Tax Credit, for more about the rules. If you care for a parent, sibling or other non-child dependent, or you have dependent children, age 17 or older, who are not disabled you may qualify for a $500 Dependent Care credit, depending on income limits. Disabled children or other dependents usually qualify for CTC and/or DCC at any age, subject to income limits.

3. The Retirement Savings Credit

This helps workers save for retirement. You may qualify if your income is $66,000 or less in 2021 and you contribute to an IRA or a retirement plan at work. Check out Publication 590, Individual Retirement Arrangements (IRAs).

Did you, your spouse or your dependent take higher education classes last or this year?

If so, you may be able to claim some education credits such as the American Opportunity Credit or the Lifetime Learning Credit to help cover the costs.

4. The American Opportunity Credit is:

• Worth up to $2,500 per eligible student.
• Only available for the first four years at an eligible college or vocational school.
• Subtracted from your taxes but can also give you a refund of up to $1,000, if it’s more than your taxes.
• For students earning a degree or other recognized credential.
• For students going to school at least half-time or at least one academic period that started during the tax year.
• For the cost of tuition, books and required fees and supplies.

5. The Lifetime Learning Credit is:

• Limited to $2,000 per tax return, per year, no matter how many students qualify.
• For all years of higher education, including classes for learning or improving job skills.
• Limited to the amount of your taxes.
• For the cost of tuition and required fees, plus books, supplies and equipment you must buy from the school.

For both School credits:

 Your school should give you a Form 1098-T, Tuition Statement, showing tuition paid for the year. Make sure it’s correct.

 You must file Form 8863, Education Credits, to claim these credits on your tax return.

 You can claim only one type of education credit per student on your federal tax return each year. If more than one student qualifies for a credit in the same year, you can claim a different credit for each student.  For example, you can claim the AOTC for one student and claim the LLC for the other student.

 Eligible schools are those that offer education beyond high school. This includes most colleges and universities. Vocational schools or other postsecondary schools may also qualify.

 You can’t claim either credit if someone else claims you as a dependent.

 You can’t claim both credits for the same student or for the same expense, in the same year.

 The credits are subject to income limits that could reduce the amount you can claim on your return.

 Nonresident alien.  If you are in the U.S. on an F-1 student visa, you usually file your federal tax return as a nonresident alien. You can’t claim an education credit if you were a nonresident alien for any part of the tax year unless you elect to be treated as a resident alien for federal tax purposes. To learn more about these rules, see Publication 519, U.S. Tax Guide for Aliens.

 Income limits. These credits are subject to income limitations and may be reduced or eliminated, based on your income.

6. Foreign Tax Credits and Exclusions

Some taxpayers earn interest and dividend income from foreign investments. Some of the income comes from investing in mutual funds or exchange traded funds (ETF). That income sometimes require that the taxpayer pays foreign taxes, to the government, where the investments are located. Some taxpayers work outside of the United States and must pay foreign income taxes on the income they earn overseas. If US taxpayers pay foreign taxes, either from wages or investments, the amount of the foreign taxes paid, is considered a credit against US tax, on their personal tax return. This may be accomplished by completing IRS Form 1116. (irs.gov/forms), or taking the deduction on Schedule A, under TAXES section. Your tax preparer would be able to determine which of the two options is best for you, based on your circumstances.

Also, when Americans work overseas for foreign companies, there is an exclusion allowed each year by the IRS (azmoneyguy would know how much is allowed for this year).

This exclusion or credit is non-refundable. A non-refundable credit means the amount of the credit can reduce or eliminate Federal Income taxes, but any excess credit will not be given back to the taxpayer, as a refund. You can’t get refunds from this credit, only tax reduction, but the exclusion, deduction or credit can reduce your income taxes to ZERO.

• US taxpayers may be able to get a tax credit for paying taxes in a different country for earning income from interest, or dividends
• You have a choice of claiming the taxes on Schedule A or Form 1116, whichever benefits you most
• The tax benefit is a non-refundable credit. This means you can reduce or eliminate tax down to ZERO
• Some income earned from a foreign company in a foreign country by Americans, can be excluded each year from paying taxes on it. See your tax professional for each year’s excluded amount

And finally, here are some energy credits to consider:

7. Non-Business Energy Property Credit

 This credit is worth 10 percent of the cost of certain qualified energy-saving items you added to your main home last year. This includes items such as insulation, windows, doors and roofs, heat pumps, water heaters, air conditioners, furnaces, air circulating fans are but a few examples of items that qualify for the credit.

 You may also be able to claim the credit for the actual cost and installation of certain property. This may include items such as water heaters and heating and air conditioning systems named above. Each type of property has a different dollar limit.

 This credit has a maximum lifetime limit of $500. You may only use $200 of this limit for windows.

 Your main home must be located in the U.S. to qualify for the credit.

 Be sure you have the written certification from the manufacturer that their product qualifies for this tax credit. They usually post it on their website or include it with the product’s packaging. You can rely on it to claim the credit, but do not attach it to your return. Keep it with your tax records.

8. Residential Energy Efficient Property Credit

 This tax credit is 30 percent of the cost of alternative energy equipment installed on or in your home.

 Qualified equipment includes solar hot water heaters, solar electric equipment and wind turbines, geothermal heaters and pumps.

 There is no dollar limit on the credit for most types of property. If your credit is more than the tax you owe, you can carry forward the unused portion of this credit to next year’s tax return.

 The home must be in the U.S. It does not have to be your main home.

 This credit is available through 2024.

Use Form 5695, Residential Energy Credits, to claim these Energy credits.

Also, always check with your state to see if it offers energy tax credits or deductions too!

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