With tax season in full force, it is essential to identify which tax credits apply to you. While many cringe at the thought of doing their taxes, it is imperative that you do not rush through returns. There are a number of tax credits that exist to help taxpayers retain more of their earnings. These can have a significant impact on income and will make for a seamless experience when filing your income tax return. Let’s explore the five biggest tax credits for the current year.
1. Earned Income Tax Credit
Established in 1975, this is one of the most substantial credits for taxpayers that is based on factors such as filing status, adjusted gross income, earned income, and investment income. To quality, individuals must be between the ages of 25 and 65, have a valid Social Security number, and have lived in the country for more than six months. Additionally, self-employed taxpayers may also qualify for it. There are a few things to keep in mind if you decide to take advantage of this credit. Individuals who are married filing separately do not qualify. You cannot be claimed as a dependent on another filer’s return and there are restrictions on investment income. Overall, the Earned Income Credit targets those who fall within the low to moderate income range.
2. American Opportunity Tax Credit
Originally known as the Hope Credit that helped families pay the costs associated with higher education, it was expanded in 2009 and rebranded as the American Opportunity Tax Credit. This credit covers four years of post-secondary education to those whose modified adjusted gross income is less than $80,000. Depending on your income, qualified individuals can receive up to $2,500 of the cost of tuition and course materials. It requires students to be enrolled at least half time and for one or more academic semesters. If tuition costs are already included as one of your tax deductions, the American Opportunity Tax Credit cannot be claimed within the same year.
3. Lifetime Learning Credit
Similar to the American Opportunity Tax Credit, the Lifetime Learning Credit was also established to offset the costs associated with post-secondary education. It differs in that it is available beyond the first four years of college and is also provided to those who are not pursuing a specified degree. Full credit of $2,000 is available to eligible individuals earning less than $55,000. As income increases, the credit phases out.
4. Child and Dependent Case Credit
Childcare is a booming industry, with daycare and babysitting prices increasing at an alarming rate. This credit helps defray the costs associated with childcare and is available to families who must pay for dependent care of children under the age of 13 in order to work or look for employment. Additionally, the credit is available for the cost of caring for a dependent of any age that is physically or mentally unable to take care of themselves. The credit provides up to 35 percent of qualified expenses, based on adjusted gross income limits.
5. Savers Tax Credit
Formerly known as the Retirement Savings Contributions Credit, the Savers Tax Credit provides up to $1,000 for eligible contributions to retirement plans such as 401(k)s. This credit is increased to $2,000 for those filing jointly. For the current year, the maximum qualifying income is $30,750 for single filers who are at least 18 years of age. Additional limitations require filers to have not been a full-time student or claimed as a dependent.
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While these five tax credits are primarily for those with low to moderate income, they can provide substantial relief when tax season hits. According to The Motley Fool, it is estimated that 20 percent of eligible Americans miss out on tax breaks that could be upwards of $6,000. These tax tricks could helps millions of taxpayers save thousands of dollars!