Tax Credits Boost Your Refund
Tax credits are different, and often more valuable, than tax deductions because they are actual reductions in your income tax due. For example, a taxpayer in a 12% marginal tax bracket only reduces his tax bill by $120 with a $1,000 deduction. A taxpayer with a $1,000 tax credit reduces his tax bill by the full $1,000.
Child Tax Credit
One of the most family-friendly tax benefits is the Child Tax Credit. Current tax law provides for a credit of up to $2,000 per child under age 17 at year-end. Up to $1,400 of the credit is refundable (meaning you can receive the credit even if your tax liability is zero). The credit phases out for married taxpayers with more than $400,000 of income and heads of household with income exceeding $200,000.
The $500 credit for dependents other than children remains in place this year, and is available for families whose children are over 17, away at college, or have other relatives living in your home such as extended family members.
Earned Income Tax Credit
The Earned Income Tax Credit (EITC) has increased to a maximum amount of $6,557 for taxpayers with 3 or more qualifying children. The credit varies on your income and the number of children in your household, and was designed to help lower-income taxpayers.
Child and Dependent Care Credit
This popular credit is worth up to $600 per child (maximum of $1,200 for two or more children) as a subsidy for childcare costs for working parents. Married filers and heads of household may claim the credit for their children under 13 years old. There is no income limit, but there is a sliding scale of the credit as a percentage of costs incurred.
College Tax Credits
The American Opportunity Credit provides up to $2,500 in tax credits for the first $4,000 spent on qualifying expenses annually for the first four years of undergraduate college education. The Lifetime Learning Credit is an alternative benefit that pays you back 20% of the first $10,000 of college tuition and expenses, and has no limit on the number of years it is available.
Savers Tax Credit
An often-overlooked credit is the Savers Tax Credit that has a maximum value of $2,000 off your income tax. Married taxpayers with income up to $48,000 ($32,000 for single filers) may claim a tax credit up to 50% of their retirement contributions to plans such as 401k, 403b or IRAs.
Federal Adoption Tax Credit
For adoptions finalized in 2019, a credit of up to $14,080 per child is available and is based on adoption costs and expenses, and whether the child was classified as special needs. The credit is nonrefundable, but it can be carried over into future years. Taxpayers should seek professional advice for this credit as it has many requirements.
Residential Energy Efficient Property Credit
This credit has briefly returned, currently good through 2021, and provides a small credit for residential energy efficiency improvements such as solar panels, windows, air conditioners, insulation, roofing, etc. The credit is relatively small, but is worth taking if you need to make these kinds of improvements.
Keep in mind that most tax credits have income limitations of some type. Other credits are also in the tax law, so be sure to do your research and ask your tax preparer if you qualify for them.