Navigating IRS Tax Credits and Which You Should be Aware of
IRS tax credits and deductions are very similar in that they reduce the amount owed by a filer, however, there is a difference in how they do this. Credits reduce a payer's tax liability while deductions reduce a payer's taxable income. A credit will be felt equally by all those who qualify for it. A deduction will be felt differently by filers with different tax rates. Also, credits can sometimes reduce a tax liability to less than $0, resulting in a refund (noted as refundable below). This distinction makes them very valuable for all filers and here are some which you may want to be aware of this filing season:
Additional Child Tax Credit - Tax filers qualify for additional child tax credits when the amount of taxes owed is less than total child tax credits. Schedule 8812 on IRS Form 1040 is used to determine if filers are entitled to additional child tax credits.
Adoption - Up to $14,890 is considered a non-refundable credit. It is phased out at higher incomes.
Childcare and Dependent Care - Qualified dependents include children under the age of 13 who have lived with the taxpayer for at least half of the year. Dependents may also be individuals who are unable to provide care for themselves. Covers up to 50% of qualified care (work related) expenses. Childcare or dependent care must occur while the taxpayer is working or searching for employment opportunities. Expenses cannot be related to schooling at the kindergarten level or above. However, expenses related to preschool can be claimed as IRS tax credits. The IRS advises taxpayers to review this information before claiming the credit, you can do this here.
Claiming the Child Tax Credit - Many changes made to the Child Tax Credit as the result of the American Rescue Plan Act of 2021 have expired and the child tax credit will remain the same in 2024 as it was in 2023 and 2022 (note, the refundable portion of this credit has increased). That is, $2,000 per child, which phases out when family incomes reach $400,000 or single filers reach $200,000.The children must be under 17 by December 31 of the subject tax year. Additionally, the tax filer and children should be related in some way and the children are claimed as dependents on the tax return. The children must be U.S. citizens or resident aliens and must meet the residency requirements specifying that children must have lived with the tax filer for at least half of the year. IRS Publication 972 outlines the requirements for child tax credits. For additional children see Additional Child Tax Credit (above.)
If you provide in-home care to an elderly or disabled relative, you may qualify for several IRS tax credits and benefits to help recoup any associated costs. You may be able to claim your relative as a dependent if you have provided more than 50 percent of the support he or she required.
When you claim the relative as a dependent, you are allowed to deduct his or her medical expenses if they were more than 10 percent of your adjusted gross income. Medical expenses include the cost of medical procedures, amounts paid for medical equipment and home-improvement projects completed strictly for the purpose of medical care.
Earned Income - The Earned Income Tax Credit (EITC) significantly decreases the amount of federal taxes that many Americans pay. As of 2022, taxpayers without children can take this credit when they earn no more than $21,430. They must be 25 to 64 years old to qualify, according to IRS.gov. However, no age restrictions apply to parents or disabled children. Income limits for families with kids also remain much higher. This credit's rules prove quite complex; a person's income sources, government benefits or marital status may affect eligibility. The maximum credit for taxpayers with no children is $1,502. Citizens must file yearly tax returns to claim the EITC, and parents need to supply the IRS with extra information about their children. It is phased out for incomes above a certain levels.
Education - There are several different programs being offered to assist low to moderate income individuals with education expenses. The American Opportunities, Hope and Lifetime Leaning are three of the programs. See guidelines for each on the IRS website here.
Elderly, Senior or Disabled Tax Credit - The primary qualifications for this tax credit require that filers meet the stipulated age and income limits. People who are aged 65 or older, those who are retired, or people who receive permanent disability may qualify if their incomes meet the current year’s limits. Moreover, seniors must file either a joint return if they are married or file as head of household to receive this tax credit. People who are below the age of 65 could still qualify for this credit if they are permanently disabled. Before they file, they may be required to obtain documentation from their physician stating that they are mentally or physically unable to return to work. Along with obtaining a note from their doctor, these individuals, as with senior citizens who plan to claim the credit, must have incomes that fall at or below the stipulated amount for that particular tax year.
Health Care - Starting in 2014, as part of the Affordable Care Act (aka Obamacare) refundable credits will be offered to low income individuals and families purchasing coverage in one of the health exchanges.
Hope Scholarship - The Hope Scholarship program was expanded and renamed the American Opportunity Tax Credit. It enables filers to claim a tax credit for expenses related to tuition as well as certain fees and course materials expended for higher education in tax-years 2009 through 2017. Expenses that do not qualify for the tax deduction include room and board, travel costs and medical insurance as well as fees paid with tax-free educational assistance.
Retirement Savings Contribution - This is a non-refundable tax credit of up to $2000 (married filing jointly can contribute and additional $2000 for their spouse) for voluntary contributions to an IRA, 401k, 403b or similar approved retirement plan. It is however, phased out at incomes above $34,000 ($68,000 for joint returns).
Infographic on Tax Saving Credits
In recent tax seasons there have been a number of special tax credits that have been made available. Some of these credits are now expired others will be expiring soon. Here are a few of those
Expiring Soon
The tax credit has been changed until December, 31 2022 to 26% of cost with no upper limit for Energy Incentives thet include geothermal, wind and fuel cell improvements. Additionally Additionally, for new residential and commercial solar customers, tax credits of 22% of cost will be available for Solar Energy Systems after this year.
Recently Expired
First Time Homebuyer Credit - Tax filers who bought their principal home between April 8, 2008 and May 1, 2010 qualified for the first time homebuyer credit if they had not owned a home in the prior three years. The actual purchase date determined the amount and requirements. The first time homebuyer credit phased out when the modified adjusted gross income or MAGI reached $150,000 for married couples filing a joint return and $75,000 for other taxpayers who purchased a qualifying home before November 6, 2009. For home purchases after this date, married couples filing jointly got the full credit if their MAGI does not exceed the $225,000 threshold. The same is true for other filers whose MAGI does not exceed $125,000. Taxpayers who claimed the first time homebuyer tax credit used the qualifying home as their principal residence for at least 36 months or faced repayment of the credit. When first made available in 2009, it offered a $8,000 for first-time home buyers. This as well as the federal housing credit for service members (offered $8,000 for first-time home buyers and $6,500 for repeat home buyers) are both expired.
Beginning in 2006 special credits were offered for the purchase of hybrid vehicles, while this has since been phased out, plug-in electric vehicles may still qualify for a credit.
As you can see, some of these may not last forever. File your return with us and we will make sure you will get the benefit of every IRS credit available to you.