Don’t Overlook These 8 Money-saving Tax Credits
Federal tax credits help millions of families save money on taxes each year. Find out if you're eligible.
What’s the best way to reduce the pain in paying taxes? By taking credit where credit is due.
In this case, we mean applying and qualifying for the many federal tax credits that are designed to provide financial relief for particular circumstances—whether you’re trying to save money, go to school, get health coverage, pay for a caretaker or even adopt a child. To find out what’s out there, what’s involved and how you can benefit, read on. (Official IRS links for each credit are provided so you can get details about each one, with respect to eligibility requirements, application specifics and other key information.)
The beauty of a tax credit is that it reduces your actual tax bill dollar for dollar, unlike a deduction, which reduces your income and lowers your tax bill only by the tax rate you would have paid on that amount. Moreover, some tax credits are “refundable” to a certain extent, which means the government will actually pay you if the amount of the credit exceeds your tax bill.
Commonly referred to as the EITC, this is intended as “a tax credit to help you keep more of what you earned,” according to the IRS. (Actually, that’s what all tax credits do.) To qualify, you must fall into a low- to moderate-earnings range and make income from employment, self-employment or another source. The credit amount depends upon your income and the number of children you have, if any. But it can go as high as just over $6,269.
As is often the case, there are rules involved that force many tax filers to make choices.
“It is possible to claim a dependent for EITC purposes, and not claim them as an exemption, if they meet the EITC tests,” says Kevin Hopson, co-founder and CEO of TaxPoint, an online tax-filing software company. “If your dependent has an Individual Taxpayer Identification Number (ITIN), they automatically do not qualify for the EITC. But having a Social Security number won’t discount them. And here’s a common ‘miss’ with the EITC: The dependent doesn’t necessarily have to be 18 or under. If they’re over 18, they’ll qualify if they’re disabled or a full-time student. A full-time student is someone from age 19 to 23 as of Dec. 31, and went to school for at least five months during the tax year. So if you have kids in college who fall into this category, they qualify!”
The EITC falls into the “refundable” category, so that in some cases tax filers will actually receive money from the government if the credit exceeds their tax bill. Unfortunately, government studies suggest that as many as 7 million households, some 25%, that are eligible for the EITC fail to claim it.
Saver’s Credit. The Saver’s Credit benefits those with low-to-moderate incomes, to give them an incentive to save toward retirement. It includes plans such as a traditional or Roth IRA, SIMPLE IRA, SARSEP, 401(k), 403(b), 501(c)(18) or the governmental 457(b). Calculated upon the first $2,000 socked away, the maximum credit is $1,000 for an individual and $2,000 for married couples. However, the payout is often much less, reduced according to other deductions and credits taken.
“This is an often overlooked credit,” Hopson says. “What’s interesting here is that if you set aside money for an employer-sponsored savings plan, your taxable income is lowered by that amount. That, in turn, may make you eligible for more of the EITC. Plus, you receive the Saver’s Credit. This means you benefit greatly in multiple ways by contributing to your employer’s retirement plan. There’s also incentive for not withdrawing from the plan—if you take out more than you put in, you won’t qualify.” (Don’t forget that many work-sponsored retirement plans offer matches on contributions, which means even more money for participants.)
American Opportunity Credit. This modifies the existing Hope Credit, which offsets costs of the first two years of a postsecondary education. The American Opportunity Credit can be claimed for four years, not two. Unlike other education tax credits, expenses for course-related books and supplies that aren’t paid to the school itself are eligible. It’s worth up to $2,500 of the cost of tuition, fees and course materials, and 40% of that is refundable. A refundable credit can reduce your total tax owed to a negative number, meaning Uncle Sam pays you instead of the other way around. “In other words, you could get a refund of up to $1,000—even if you owe no taxes whatsoever,” says tax expert Jayson Mullin, co-owner of Houston-based Top Tax Defenders and co-host of the local radio show, Tax Time.
Lifetime Learning Credit. The Lifetime Learning Credit helps cover qualified tuition and related expenses on the part of students pursuing undergraduate, graduate and professional degree courses. This includes courses intended to acquire or improve job skills, like a teaching certificate. It’s worth up to $2,000 every tax year, but it’s non-refundable. With a non-refundable credit, you can only reduce your tax burden to zero, instead of getting money back through a refundable credit.
“Even though the Lifetime Learning Credit is non-refundable, there is much to like about it,” Hopson says. “For starters, there is no time limit on it. You can spend your whole life going to college full-time and take advantage of it. You must be in school for at least one full-time semester per year. You can’t claim the American Opportunity and Lifetime Learning credits in the same tax year. And you can’t claim the Lifetime Learning Credit on anything you spent that came from scholarship money—it has to be out of your own pocket, or from a school loan.”
Credit for Child and Dependent Care. This is for people who, in order to work or look for work, need to pay for services for either children, a spouse or dependent of any age who is physically or mentally unable to care for themselves. “For example, if your spouse is incapable of self-care and requires a nurse’s supervision while you’re at work, you can potentially claim some of the expenses,” Mullin says. “That said, you can’t claim expenses created by one dependent to take care of another.” The credit is capped at $1,050 for a single dependent and $2,100 for two or more.
Premium Tax Credit. The Premium Tax Credit, a fully refundable tax credit, was introduced last year to help citizens who are covered by a healthcare exchange through the HealthCare.gov marketplace. The intent here is to ensure that the monthly premiums are more affordable for middle and low-income Americans. “If you meet eligibility requirements, you can have the credit paid directly to your insurance provider to lower your out-of-pocket premiums, or you can have the full amount refunded in a lump sum after filing your annual return,” Mullin says. “The actual amount is estimated based upon the size of your family and your projected earnings. So make sure you report any changes in income or family size or you may miss out on an important benefit!”
Adoption Credit. The Adoption Credit helps families offset the high cost of adopting a child. Qualified expenses include court/attorney fees, traveling expenses—such as meals and lodging while away from home—and any other associated costs of adoption. It applies to all forms of adoption except for that on the part of a step parent. For the 2016 tax year, the credit will be worth up to $13,400. “If you adopt a special-needs child, you can claim the full credit amount even if your actual adoption costs are less,” says Vanessa Borges, tax preparation supervisor at the Tax Defense Network, a Jacksonville, Fla.-based tax resolution company. It is, however, nonrefundable, meaning the amount is limited to your actual tax liability.
The Child Tax Credit. This longstanding tax credit allows for up to $1,000 in reduced federal income taxes per child. “It doesn’t matter if the child was born in late December,” Borges says. “You still get that much in credit to reduce your tax bill dollar-for-dollar.”
* NOTE: All of the information in this article is accurate as of December 15, 2016.
TAX RESOURCES FOR EDUCATORS
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