KristiLyn Wilkinson, Empowering Financial Wellness Program Manager
When I say “it’s that time of year again,” I know most of you wish I was talking about pumpkin spice everything and not taxes. I bet most people don’t enjoy doing their taxes or owing money for taxes, but I know a lot of people who do look forward to getting their tax refunds. When it comes to saving money on your taxes, tax credits are your best friend. Adjustments and deductions lower your taxable income by a certain percentage (this is based on your marginal tax bracket). Tax credits, however, let you reduce the amount of tax you owe dollar for dollar and that means more money back in your pocket!
Here is an example. Let’s say you have a $100 deduction on your taxes and you are in the 12% marginal tax bracket. That $100 deduction would lower your taxable income by $12. If you have a $100 tax credit, it lowers the tax you owe by $100! See what I mean! Tax credits are like chocolate- you want them and as many of them as you can get! Before I tell you about some of these tax credits, we need to understand the difference between a refundable and a non-refundable credit. A non-refundable credit will bring your tax liability to zero- so that you don’t owe any money in taxes. A refundable credit, however, will give you money back from the government even if you don’t owe any taxes. A refundable credit is like adding chocolate syrup to your chocolate tax credit. Are you ready to have your cake and eat it too? Let’s walk through a few tax credits that you want to take advantage of if they are applicable to your situation.
The Earned Income Tax Credit: The earned income credit is available to those who have “earned income” that falls within certain income brackets. This credit was designed to help people who are working to stay out of poverty. The amount you qualify for depends on the number of qualified dependents you claim on your tax return. For example, on your 2020 taxes, a family with three or more children with an earned income (and an adjusted gross income) of less than $55,952 could qualify for the credit. This tax credit is refundable, so even if you don’t owe any taxes you could still get the money from this tax credit!
Child Tax Credit: If you have children under the age of 17 and you claim them as a dependent on your tax return, you can also claim the child tax credit. The tax credit is $2,000 per dependent child, and up to $1,400 of that amount is refundable. As with most tax credits, the amount you get back is phased out once your income exceeds a specified amount.
Saver's Tax Credit, Retirement Savings Incentive: The government thinks it’s a pretty good idea to save money for retirement, so to help you in that process they have created a tax credit. This is in addition to some adjustments to income that you may already be taking advantage of if you are contributing to a 401(k) or a traditional IRA. This is a non-refundable credit that you can claim if you contribute to an employer-sponsored retirement plan or an IRA, you are at least 18 years old, not a full-time student, and you make less than $65,000 a year for 2020 if you are married filing jointly.
American Opportunity Credit: College doesn’t seem to be getting any cheaper. Luckily, there is a credit for that! If you are at least a part-time student, within certain income limits, and in your first four years of higher ed schooling, you may qualify for the American Opportunity credit. (I’ll talk to you lifetime students in a minute). This tax credit can give you up to $2,500 (depending on how much you pay in tuition) with up to 40%, or $1,000, of that amount refundable. Oh, but you can’t have a felony drug conviction with the year that you claim this credit- so keep your nose clean!
Lifetime Learning Credit: The Lifetime Learning Credit can be used after you have exhausted the American Opportunity Credit.This non-refundable credit allows you to deduct up to 20% of $10,000 paid in tuition- for a maximum credit of $2,000. You can claim this credit for any post-secondary classes you take, even if you aren’t working towards a degree.
*This information was referenced from the IRS.gov website. The thresholds for qualifying for certain credits can be adjusted annually, so always check the irs.gov website to make sure you have the most updated and detailed information when filing your taxes. Earned Income Tax Credit, Child Tax Credit, Saver's Tax Credit, American Opportunity Credit, Lifetime Learning Credit
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