IRS Federal Tax Credits

What They Are and How They Can Help With Your Next Tax Return

Paying taxes can be a hassle, but there are tax credits you can apply for that can reduce the amount of taxes you pay on your yearly tax return. Federal tax credits are a big helping hand for those who qualify. These Federal tax credits can help reduce the taxes you owe and can maximize your tax refund.

What Are Federal Tax Credits?

Tax credits are a dollar-for-dollar reduction of income tax you owe to federal and state governments. Tax credits were designed to offer assistance to individuals for tax liabilities.

How Do Tax Credits Work?

Let’s say you owe $1,500 in federal taxes. You find out that you are eligible for a $1,000 tax credit. Your net liability would be $500. Individuals may also qualify for income-earned credits, which are refundable. This means you can still receive the full amount of the credit even if it exceeds your taxes. For instance, if your total taxes is $500, and you claim a $1,000 on earned income, you will receive $500 in refunds.

What Are the Different Kinds of Tax Credits?

There are many kinds of tax credits such as healthcare, family/dependent, homeowners, income and savings, and education credits. Business owners can also claim credits if they own a small business or if they are self-employed.

Tax Credit vs Tax Deduction – How Do You Compare the Two?

Tax credits and deductions may sound similar, but in comparison, the terms differ. As previously stated, tax credits reduce the amount you owe in taxes which helps taxpayers save more money. A tax deduction only reduces the amount of income before calculating the taxes you owe.

Do Different States Offer Federal Tax Credits?

Many states offer tax credits that residents can apply for. For instance, if you live in the state of California, you may qualify for a renter’s credit if you pay rent for housing, if you have low-to-moderate income, or if you meet any other state requirements. In the District of Columbia, taxpayers are offered credits that apply to earned income tax credits.

What Taxes Can I Qualify for and What Are the Requirements?

There are a large number of credits that offer assistance to taxpayers that have middle or low-income households. Here are a few you may qualify for your next tax return.

1. Earned Income Tax Credit (EITC)

The Earned Income Tax Credit (EITC) was established in 1975 to offset the hefty load of Social Security taxes. The EITC varies based on the amount of income and filing status: single, married filing jointly, and those with children. Your eligibility and the amount of credit you earn are based on earned income, adjusted gross income, and investments.

• As of 2021, you need to be at least 19 years of age. Students must be at least 24 years old.
• If you are married, you and your spouse must have a valid Social Security Number and be a resident of the country for 6 months.
• If you are self-employed, you may be eligible for the EITC. (It is recommended to check your eligibility each tax year.)
• You will not qualify for this credit if you are claimed as a dependent.

Moreover, you will not qualify for EITC if you:

• Have earned $10,000+ in 2021 investment income.

2. American Opportunity Tax Credit (AOTC)

The American Opportunity Tax Credit is an expansion of the Hope Tax Credit. The Hope Tax credit was established for eligible students to complete their four years of college and help families pay for higher education. Eligible students would receive up to $2,500 in tax credits. Since 2009, the credit was named the American Opportunity Tax Credit.

• Depending on your income you may receive up to $2,500, but the credit amount may drop depending on income level. Moreover, it helps with material courses and college tuition costs.
• This credit applies to students who are attending a college with four years of post-secondary education.
• Those who have a modified adjusted gross income (MAGI) of $80,000 or less for single filers, or $160,000 or less if married and filing jointly.
• A student must be enrolled for at least part-time.
• This credit is only available for students.

3. Child and Dependent Care Credit

The Child and Dependent Care Credit is available for individuals who have to pay for childcare or daycare in order to work or look for work. This applies if the dependent is under the age of 13.

Furthermore, the credit is available for the cost of caring for a dependent or spouse of any age, who is incapable of self-care.

• To qualify, you must be a single filer, head of household, married filing jointly, or a qualifying widow with a child that qualifies.
• This credit can be applied to qualifying expenses of up to $3,000 if you pay for the care of one child, and up to $6,000 for two or more children.

4. Savers Tax Credit

The Savers Tax Credit was formerly known as the “Retirement Savings Contributions Credit.” This credit allows contributions to retirement plans such as 401(k)s, investment retirement accounts, and other retirement plans.

• Taxpayers with low income may qualify up to $1,000 for single filers and are to $2,000 if filing jointly.
• A filer needs to be at least 18 years old to qualify. They may not be a full-time student during the year or be claimed as dependent on another tax return.

5. Lifetime Learning Credit

The Lifetime Learning Credit was established to offset the cost of post-secondary education. Unlike the AOTC, this credit is available to students who attend post-secondary education for any year, not just the first four years.

• Students can qualify for the Lifetime Learning Credit, even if they are not pursuing a degree.
• Qualifying students may receive up to $2,000.
• Qualifying individuals can receive this credit if their income is up to $80,000 or less for single filers and $160,000 or less for married couples filing jointly.

6. Advanced Premium Tax Credit (APTC)

This tax credit is available to help eligible taxpayers lower their monthly health insurance payments.

• To be eligible, a member must have health coverage from the Health Insurance Marketplace for at least one month in a calendar year. Moreover, they are not eligible for enrollment in government health coverage such as Medicare, Medicaid, or TRICARE.
• You will need to have a qualifying income limit.
• You cannot file a married filing separated tax return.
• You cannot be claimed as dependent on another tax return.

There are other credits that allow you to save on “green purchases:”

• If you have a new plug-in electric vehicle, you may receive up to $7,000. The credit gives you $2,500 or 10% of the cost depending on the battery capacity and the number of wheels.
• The residential tax credit can save you up to 25% for the cost of solar purchases such as solar panels and solar water heaters. This credit is said to expire in 2024.

I Qualify for a Tax Credit. What Forms Do I Need to Fill Out to Receive My Tax Credit?

You must file for your yearly U.S. Individual Income Tax Return and Form 1040. If you are a senior citizen, you must file Form 1040 SR and the U.S. Tax Return for Seniors.

I Have a Small Business – What Tax Credit Can I Qualify for?

If you have a small business you may be eligible for various tax credits

1. Small Business Health Care Tax Credit

The Small Business Health Care Tax Credit is an available U.S. tax credit that allows small business employers with the cost of health insurance premiums.

To be eligible:

• You must have up to 25 employees in your workplace.
• Your average wages must be less than $50,000 per year for full-time employees.
• Small employers must offer an eligible health plan to their employees. It has to be through the Small Business Health Options Program (SHOP) Marketplace.
• You must pay at least half or 50% of the cost of health coverage for employees only. This excludes families and dependents.

2. The General Business Credit

The General Business Credit is a number of individual credits that can be applied to tax liabilities for a business on a tax return. It’s not a single credit, but it can be used for certain business activities such as pension plans, oil recovery, or business research. Here is a list of business credits you may qualify for:

• Work Opportunity Tax Credit (WOTC) – Available to employers that hire employees from targeted groups, or who have faced barriers regarding employment.
• Employer-provided Child Care Credit – A tax incentive that allows employers to provide child care for their employees.
• Low-Income Housing Tax Credit – This allows property developers to renovate, construct, or purchase housing for low-income individuals.
• SECURE Act Tax Credit – Allows an eligible small business to claim tax credits for taking up a new 401(k) plan.

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