Wherever you are, taxes are a vague annual obligation with seemingly endless secrets to uncover for ultimate savings. The U.S. federal government sets up tax credits to help Americans lighten their burdens. Eligible benefits lower taxable income and provide other incentives that invest in the betterment of the nation.
It helps to understand what’s out there and what taxpayers have to do to get the rewards. Seemingly every year new credits are added and removed, but some have remained staples. Here are the requirements for each tax credit and how much they will save you on your returns.
What are tax credits and why should you use them?
Tax credits reduce liability. Federal and local governments reward them to reduce financial burdens, especially for lower to middle-income households. Tax credits are not the same as deductions, which reduce taxable income.
For example, if you earned $35,000 in a year but had deductions of $12,000, you would be taxed on $23,000. Tax credits work slightly differently, as they reduce the amount of taxes owed. They eliminate what you have to pay, which varies depending on your tax bracket.
Everyone should take advantage of tax credits – some deliberately seek them year-round to maximize their returns. Credits provide a greater return, especially if you consciously go to earn them. However, more diverse and niche content can be used to get the most out of your tax year.
Their strict requirements reflect their worth. Not every family can qualify for credits related to their dependents, especially if they earn more. Governments have designed tax cuts to empower lower-income households during a financially stressful time of year, eliminating class differences as much as possible. Eligibility criteria may include prizes awarded to homes in greatest need.
States offer credits depending on current legislation and initiatives. For example, a state may offer more diverse sustainability benefits than the federal government if it is required to meet metrics by a certain date. These are the credits available for different situations and life stages.
Are there tax benefits for students?
Despite myths about student tax liability, they still have to file taxes if they work, regardless of their tuition or loan situation, or if their parents claim them as dependents on their tax return. Every employee must declare income. Nevertheless, being a student has its perks during tax season, as there are educational credits and other perks to note when filing.
Lifetime Learning Credit (LLC)
The LLC helps students pay for tuition – not supplies, room and board, or transportation. There is a predetermined list of eligible institutions, so make sure your university is included. It could exclude smaller or private schools. However, it can reduce the tax liability by $2,500 for four years of higher education, including associate or graduate degrees and professional development courses such as trades. Using vocational skills credit reduces the benefit to $2,000, but there is no time limit.
American Opportunity Credit (AOTC)
The AOTC also rewards students pursuing post-secondary education, especially undergraduates. It has a price tag similar to the LLC — up to $2,500 — but students must qualify at a minimum for part-time enrollment. The AOTC covers course materials, such as books and supplies, in addition to tuition, but only for up to four years. Vocational training or professional development is not eligible.
Other important notes
These credits are subject to income limits and students cannot earn both. The income limit for a household must be less than $80,000 for individual filers and $160,000 for joint payers. To expand benefits from educational tax credits to skyrocket the value:
- Student loan interest
- Educational savings plans
- Repayment of employer debt
- Tuition reimbursement
Are there tax credits for national improvement?
The federal government wants citizens to get tax credits because it incentivizes them to meet national goals.
Energy efficiency incentives
The country has sustainability benchmarks that must be met to combat climate change and as a current signatory to the Paris Agreement. It’s vital to note that additional legislation, such as the Inflation Reduction Act of 2022, can increase or decrease existing tax credits — luckily for environmentalists, this tax credit became more attractive to Americans. There are several ways to bank on it.
First, Americans can move to energy-efficient appliances. The credit covers 10% of the cost of each eligible costs up to $3,200included:
- Heat pumps
- Electrical upgrades
- Energy Star appliances
Another way is to switch to sustainable energy generation, also known as the Residential Clean Energy credit. Installing geothermal, wind, biomass or solar systems can earn households a 30% tax credit for qualifying clean energy improvements. The benefit will decrease to 22% after 2033, bringing a sense of urgency to citizens who want to get the most out of their dollars.
There is also a tax credit for electric vehicles, depending on specific cars set by the Department of Energy of up to $7,500.
Those affected by disasters, such as hurricanes and wildfires, will receive federal assistance to promote healing and growth in affected communities. It is beneficial for governments to take care of these areas to maintain economic stability. FEMA will declare areas as federally declared disaster areas, and if your site is on the list, make sure you file taxes accordingly. Disaster credits are different than an outright dollar amount.
The first benefit is a tax deferral. Many in disaster situations don’t want to worry about taxes as they rebuild their livelihoods. The government understands how many natural incidents uproot lives and included that consideration as part of the credit. People can also file an amended return for the previous year to expedite federal aid instead of waiting a year after the disaster happened to get aid. This is called damage deduction.
Businesses can help employees by providing tax-free gifts to get them back on their feet.
Are there tax credits for parents and guardians?
Most countries reward adults for starting families, as increasing populations indicate healthy national progress and advancing economies. Families have multiple options for federal credit.
Child Care and Dependent Care Credit (CDCC)
Child care is a national issue, leading parents to look for outsourced help every week to get back to work. The CDCC hopes to solve some of these problems by helping pay for day care for dependents under the age of 13. It also includes caring for family members and partners who are sick or can no longer care for themselves, so keep track of related expenses. You should get 35% back on $3,000 in eligible expenses for one dependent and $6,000 for two or more.
Child tax credit
Families with children under 16 can deposit $2,000 per eligible child, but only $1,500 is refundable. Not all tax credits result in cashback, so read the fine print. Parents and guardians claiming half of the individual’s care can apply for this credit, assuming they fall below the $200,000 income limit for individual petitioners and the $400,000 limit for joint petitioners.
The credit is another example of a change caused by legislation. During the COVID-19 pandemic, it helped families get through the crisis faster US bailout plan of 2021 by giving households advances, which significantly increases the amount of credit.
Adoption costs are expensive and the process is labor intensive. The adoption credit helps families by offering a non-refundable $14,890 per child for help with everything related to the adoption process. Families cannot earn more than $223,410 if they want the full price.
Are there tax credits based on expenses?
Sometimes it helps to offset your tax credits by putting money in the right places or earning the right income. Here are some of the most popular conditions.
Earned Income Tax Credit (EITC)
The EITC is there to help low-income people with or without children. Earned income refers to wages, self-employment, or other taxable income from other sources. These are the current requirements for obtaining this tax credit according to the IRS, although there are special rules for military, clergy, and people with disabilities:
- For zero children, have an AGI between $17,640 and $24,210, respectively, single and joint
- Have an AGI between $46,560 and $53,120 for one child, single and joint respectively
- Have less than $10,300 in investment income
- Proof of citizenship or resident alien status
Qualifications are subject to change and fluctuate depending on the number of children.
Are you over 18, claiming yourself and not going to school? Then you are eligible for this credit if you contribute to your pension. The percentage of your contribution you receive as credit depends on household income, but applies to most accounts, including 401(k)s and IRAs. Here is the breakdown for joint applicants:
- 50% if AGI is less than $43,500
- 20% if AGI is between $43,501 and $47,500
- 10% if AGI is between $47,501 and $73,000
These amounts change regularly from year to year.
Foreign tax credit
Take the foreign tax credit if you receive foreign income or invest in international investment funds. The federal government offers this if your paycheck is subject to taxes in multiple countries so you don’t have to pay twice. The tax credit also applies to investments, so talk to brokers about the fine details.
Premium tax credit
The premium discount was born after the Affordable Care Act catalyzed healthcare initiatives of former President Obama. Those insured through this program can receive tax credits for income-based premiums. These are refundable, but the amount varies by state because premiums are standardized nationwide.
Make the most of credits this tax season
Credits are one of the ways to make the most of every tax season. Some guide their financial decisions by available credits in addition to smart deductions, while others take what they can get. Now that you know the requirements, you can maximize your savings and reduce your tax bill to more realistic amounts.
While some of these benefits may seem too good to be true, they are cases where the government tries to help its citizens. Take advantage as much as possible and stay informed about national events and far-reaching legislation that can increase your tax credits in the following years.