Introduction

The tax system in the USA is quite complex, and taxpayers often miss out on credits and deductions that could potentially save them money. Tax credits are particularly beneficial, as they directly reduce the amount of tax liability owed by a taxpayer. This article provides a short guide to tax credits, highlighting the different types available and how to qualify for them.

What is a Tax Credit?

Simply put, a tax credit is a dollar-for-dollar reduction in the amount of tax a taxpayer owes. Unlike a deduction, which reduces the taxable income of a taxpayer, a credit reduces the actual tax liability. This makes it a more valuable tax benefit compared to deductions, as it directly lowers the amount of tax a taxpayer has to pay.

Types of Tax Credits

There are several types of tax credits available in the US tax system, and each has its own qualification requirements. The following are some of the most common types of tax credits:

📝 See Also

1. Earned Income Tax Credit (EITC)

The EITC is a tax credit for low- to moderate-income individuals and families. It's designed to encourage work and help offset the cost of living for low-income earners. Eligibility for the EITC is based on income, filing status, and the number of qualifying children in the household.

For the 2020 tax year, the maximum credit amount for the EITC is $6,660 for taxpayers with three or more qualifying children, $5,920 for taxpayers with two qualifying children, $3,584 for taxpayers with one qualifying child, and $538 for taxpayers with no qualifying children.

2. Child Tax Credit (CTC)

The CTC is a tax credit for taxpayers with qualifying children under the age of 17. It's designed to help offset the costs of raising a child. Eligibility for the CTC is based on income, filing status, and the number of qualifying children in the household.

For the 2020 tax year, the maximum credit amount for the CTC is $2,000 per qualifying child. Up to $1,400 of the CTC is refundable for each qualifying child, depending on the taxpayer's income.

3. American Opportunity Tax Credit (AOTC)

The AOTC is a tax credit for taxpayers paying higher education expenses for themselves or their dependents. Eligibility for the AOTC is based on income, enrollment status, and expenses incurred for qualified education. The taxpayer must be enrolled at least half-time for at least one academic period during the tax year.

For the 2020 tax year, the maximum credit amount for the AOTC is $2,500 per eligible student. The credit is phased out for taxpayers with a modified adjusted gross income (MAGI) between $80,000 and $90,000 ($160,000 to $180,000 for joint filers).

4. Lifetime Learning Credit (LLC)

The LLC is a tax credit for taxpayers paying for higher education expenses for themselves or their dependents. It's designed to help offset the costs of lifelong learning. Eligibility for the LLC is based on income, enrollment status, and expenses incurred for qualified education.

For the 2020 tax year, the maximum credit amount for the LLC is $2,000 per tax return. The credit is phased out for taxpayers with a MAGI between $59,000 and $69,000 ($118,000 to $138,000 for joint filers).

5. Saver's Credit

The Saver's Credit is a tax credit for taxpayers who make contributions to a retirement plan, such as an IRA or 401(k). It's designed to help low- and moderate-income earners save for retirement. Eligibility for the Saver's Credit is based on income, filing status, and the amount contributed to the retirement plan.

For the 2020 tax year, the maximum credit amount for the Saver's Credit is $1,000 for individuals and $2,000 for couples filing jointly. The credit is based on a percentage of the contribution amount, with a maximum of 50% for low-income earners.

How to Qualify for Tax Credits

To qualify for tax credits, taxpayers must meet certain eligibility requirements. The following are some of the most common eligibility requirements:

1. Income

Most tax credits have income limits, meaning that taxpayers must earn below a certain income level to qualify. The income limits vary depending on the tax credit and the taxpayer's filing status.

For example, for the EITC, the income limit for the 2020 tax year is $15,820 for single filers with no qualifying children, $41,756 for single filers with three or more qualifying children, and $56,844 for married filers with three or more qualifying children.

2. Filing status

Tax credits may have different requirements depending on the taxpayer's filing status. For example, the income limit for the Saver's Credit is $32,500 for single filers, $48,750 for head of household filers, and $65,000 for joint filers.

3. Age

Some tax credits, such as the Child Tax Credit, require the qualifying child to be under a certain age. For the CTC, the qualifying child must be under the age of 17 at the end of the tax year.

4. Enrollment status

For education-related tax credits, the taxpayer or the dependent must be enrolled at least half-time in a qualifying educational institution in order to qualify.

5. Expenses

For education-related tax credits, the taxpayer must have incurred qualified education expenses during the tax year. Qualifying expenses may include tuition, fees, and required materials.

Conclusion

Tax credits are a valuable tax benefit that can help taxpayers save money on their taxes. With several types of tax credits available, taxpayers should take the time to understand the eligibility requirements and how to qualify. By taking advantage of tax credits, taxpayers can reduce their tax liability and keep more of their hard-earned money.

What are Tax Credits?
Tax Credits, which are commonly-referred to as tax deductions, are individual amounts of tax relief that can be obtained by taxpayers with regard to the amount of tax withholding experienced in tandem with earnings and income. Globally, a vast array of Tax Credits exists, which can result from the number of children, expenses incurred as a result of employment, and the creation of potential economic growth.

How to Obtain Tax Credits

Depending on the individual jurisdiction, which can range from country or municipality, Tax Credits can be obtained as a result of a variety of factors. The following Tax Credits are common on both a global level, as well as on a domestic level:

Child Tax Credits: Child Tax Credits are offered in certain jurisdictions, which result from a calculation with regard to the amount of children in a family in accordance to that household’s earned income. Although the standard by which individuals with children may qualify for these types of Tax Credits varies, each jurisdiction typically institutes a calculation protocol that regulates the rate of prospective Tax Credits in conjunction with the size of a respective family.

Carbon Tax Credits

Due to the current focus of the stasis of global ecology, many governments – both on international and domestic levels – have instated Tax Credits as a result of the facilitation of renewable energy sources in residential settings, as well as commercial settings. The implementation of Carbon Tax Credits was considered to be an attempt to foster the engagement of citizens with regard to alternative energy sources, which are also considered to be renewable and sustainable; Green Tax Credits can include the facilitation of renewable energy sources such as wind turbines, solar panels, hydroelectric power, geothermal power, and the elimination of fossil fuel usage:

•    With regard to commercial establishments, the United States Federal Government may offer Green Tax Credits ranging from $0.30 to $1.80 with regard to square footage in which renewable, reusable technology is being facilitated

•    With regard to residential operation of renewable energy sources, Tax Credits afforded by the Federal Government range in value; in certain cases – depending on the nature of the renewable energy system – individuals have obtained full refunds as a result of the operation and maintenance of Green energy systems

•    Tax Credits in the forms of Mortgage and property tax relief may be obtained in the event that an individual chooses to utilize renewable energy systems within the operation of their respective household

•    Commercial operations responsible for the manufacturing of energy-efficient products may be eligible to receive Tax Credits depending on the degree of efficiency and the nature of the appliance(s); typically, these Tax Credits are awarded per qualifying unit produced

Work Opportunity Tax Credits (WOTC)

This program instituted by the United States Federal Government allows Tax Credits to qualifying commercial endeavors and operations responsible for the provision, substantiation, and maintenance of the employment of groups of individuals undergoing large-scale unemployment. These individuals may include Veterans of Foreign Wars, the elderly, and minors; programs such as these not only allow for the proliferation of employment, but also the administration of work experience, as well.