Tax credits can be an excellent way to reduce your tax bill substantially. They are different from tax deductions, which only reduce the amount of your income that is subject to tax. Tax credits reduce the amount of tax you owe, dollar for dollar. There are many different types of tax credits available, and it’s essential to know which ones you might be eligible for. This article will explore some of the most common types of tax credits, including the earned income tax credit, child tax credit, education tax credits, and energy tax credits.
The Earned Income Tax Credit
The earned income tax credit (EITC) is a refundable tax credit that is available to low- and moderate-income taxpayers who earn income from working. The credit is designed to help offset the cost of Social Security taxes and provide assistance to families with children. In 2021, the maximum credit is $6,728 for families with three or more qualifying children; $5,980 for families with two qualifying children; $3,618 for families with one qualifying child, and $543 for taxpayers who don’t have a qualifying child. The credit is indexed to inflation, so the maximum credit changes annually.
To qualify for the EITC, you must meet certain income and filing requirements. The credit is available to taxpayers with a modified adjusted gross income (MAGI) of $57,414 or less for married taxpayers filing jointly with three or more qualifying children, or $15,980 or less for taxpayers without qualifying children. The credit is phased out for higher-income taxpayers, so it’s essential to check the income limits each year to determine if you might qualify.
The Child Tax Credit
The Child Tax Credit is available to taxpayers who have qualifying children under the age of 17. In 2021, the credit is worth up to $3,000 per child under age 18 or $3,600 per child under age 6. The credit is phased out for higher-income taxpayers, starting at $75,000 for single taxpayers and $150,000 for married couples filing jointly. The phaseout reduces the credit by $50 for every $1,000 of MAGI over the threshold amount.
The Child Tax Credit is partially refundable, meaning that if the credit exceeds the amount of tax you owe, you can receive a refund for the difference. To qualify for the credit, you must have a qualifying child, meet certain income requirements, and be able to claim the child as a dependent on your tax return. Additionally, the child must be a U.S. citizen, national or resident alien.
Education Tax Credits
There are two education tax credits available to help offset the cost of higher education. The American opportunity tax credit (AOTC) and the lifetime learning credit (LLC) are both non-refundable credits that can be used to offset your tax liability.
The AOTC is available to taxpayers who are pursuing a degree or vocational credential at an eligible postsecondary institution. To qualify, you must be enrolled in a program that leads to a degree, certificate or other recognized educational credential. The credit is worth up to $2,500 per year for each eligible student for the first four years of college. The credit is partially refundable, meaning that up to $1,000 of the credit can be refunded to the taxpayer even if they have no tax liability.
The lifetime learning credit (LLC) is available to taxpayers who are enrolled in courses at an eligible educational institution. The credit is worth up to $2,000 per year for each eligible student, and there is no limit to the number of years it can be claimed. The LLC is not refundable, meaning that it can only be used to offset your tax liability up to the amount of tax you owe.
To claim either credit, you must meet certain income and enrollment requirements. The AOTC is available to taxpayers with a MAGI of $80,000 or less for singles or $160,000 or less for married couples filing jointly. The credit is phased out for higher-income taxpayers, starting at $50,000 for singles and $100,000 for married couples filing jointly. The LLC is available to taxpayers with a MAGI of $69,000 or less for singles or $138,000 or less for married couples filing jointly. The credit is phased out for higher-income taxpayers, starting at $59,000 for singles and $118,000 for married couples filing jointly.
Energy Tax Credits
Energy tax credits can be used to offset the cost of investing in renewable energy and energy-efficient technology in your home or business. These credits can help reduce your tax bill while also helping to reduce your energy costs. Some of the most common energy tax credits include the residential energy efficiency property credit, the nonbusiness energy property credit, and the alternative fuel vehicle refueling property credit.
The residential energy efficiency property credit is available to homeowners who install qualified solar electric systems, solar water heating systems, fuel cell systems, small wind energy systems, and geothermal heat pumps. The credit is worth 26% of the cost of the equipment, including installation costs. The maximum credit is $1,600 for solar electric systems, solar water heating systems, and small wind energy systems, and $2,000 for geothermal heat pumps and fuel cell systems.
The nonbusiness energy property credit is available to taxpayers who make energy-efficient improvements to their primary residence. Eligible improvements include insulation, windows, doors, roofs, and HVAC systems. The credit is worth 10% of the cost of the improvement, up to $500. The credit has a lifetime limit of $500, meaning that if you have claimed the credit in previous years, you may not be eligible for the full $500 credit.
The alternative fuel vehicle refueling property credit is available to taxpayers who invest in a qualifying alternative fuel vehicle refueling system. The credit is worth up to 30% of the cost of the system, up to a maximum credit of $1,000 for homeowners and $30,000 for businesses. Qualifying systems include electric vehicle charging stations, compressed natural gas refueling stations, and hydrogen refueling stations.
Conclusion
Tax credits can be a valuable tool for reducing your tax bill and keeping more money in your pocket. There are many different types of tax credits available, and it’s essential to understand which ones you might qualify for. The credits outlined in this article are just a few of the most common types of tax credits available. Be sure to consult a tax professional or use government resources to determine which credits you may be eligible to claim. With the right strategy, you can significantly reduce your tax bill and keep more of your hard-earned money.
