Don’t Forget About These 3 Tax Credits
Credits are a more effective tax-saving strategy than deductions, and well-known initiatives like the earned income tax credit can help you save a significant amount of money.
When filing your return, one of the most pleasant perks you might find is a tax credit.
A tax credit lowers your overall tax obligation as opposed to a deduction, which lowers the amount of income that will be subject to taxation. As a result, hundreds of dollars may be subtracted from your bill or added to your refund. With credit, you benefit 100%. It’s a complete reimbursement of the taxes you would otherwise owe.
While some tax credits are general and apply to a large portion of the population, others are tailored to encourage a particular type of economic activity. Here are some tax credits you might wish to check before filing your return.
Earned Income Tax Credit
One of the most popular income tax deductions, the earned income tax credit (EITC), was created to lessen the financial burden on middle-class and low-income households.
Four out of five taxpayers filed tax returns for the 2021 tax year, with an average benefit of almost $2,000 claimed. According to the IRS, the total amount of these credits was around $64 billion.
Even better, the EITC is a type of tax benefit referred to as “refundable.” This implies that the government will reimburse you for the difference if the credit amount exceeds the amount of taxes you owe.
Are You Eligible?
The EITC’s eligibility requirements are mostly based on your income, as its name would imply. And you must have worked to be eligible for the credit. Depending on your filing status for the 2022 tax year, the income thresholds range from $16,480 to $59,187.
There are a few further prerequisites, such as:
- Your annual investment income cannot exceed $10,300.
- There must be a valid Social Security number for each person shown on your tax return.
Children’s Tax Credit
It’s crucial to keep in mind that the child tax credit, or CTC, has undergone some significant modifications. Especially if you’ve previously used this benefit for families with children.
The government temporarily extended the credit limit during the pandemic, giving some families additional aid worth thousands of dollars. The credit, however, returned to its prior levels in 2022. Taxpayers who received a sizable refund due to the credit last year could be dissatisfied this year when they file.
However, the CTC can eliminate a sizable portion of your tax liability. Each eligible child may receive up to $2,000 in benefits, with up to $1,500 of that amount being refundable. People with dependents may be entitled to a credit of up to $500 even if they don’t qualify for the full credit.
Are You Eligible?
As long as their children have valid Social Security numbers, families with children under the age of 17 are often eligible for the child tax credit. However, your income determines how much you can claim.
Once your adjusted gross income reaches $200,000, or $400,000 for married couples filing jointly, the credit starts to phase down. The benefit expires at a certain income threshold.
Lifetime Learning Credit and the American Opportunity Credit
Two education-related tax credits that aid people with costs like tuition are the American opportunity credit and the lifetime learning credit. Although the two credits are built up similarly, they are targeted at various costs.
Students enrolling in formal degree programs are the target audience for the American opportunity credit. On the other hand, lifetime learning credit can be used for several forms of training and education.
Additionally, the American Opportunity Credit is more generous and partially refundable. Taxpayers are allowed to write off up to $2,500 per qualified student, including costs other than tuition such as course supplies. No matter how many kids would qualify, you can claim a total of $2,000 per tax return with the non-refundable lifetime learning credit for tuition only. Both credits cannot be claimed for the same student.
Are You Eligible?
These two education credits have different requirements for eligibility. For instance, to qualify for the American Opportunity Credit, students must be enrolled at least half-time and have completed four years of post-secondary study. The lifelong learning credit is more inclusive and can be used for graduate-level coursework or occupational training.
The credits do share certain fundamental criteria for qualifying. Both have an income cap of $180,000 for married couples filing jointly and $90,000 for single filers.
If you have any more questions, contact our tax experts at Your Part Time Accountant right away.