Understanding Tax Credits: Maximize Your Savings and Minimize Your Taxes
Taxpayers are often intimidated by the vast and complex tax codes, often leading to filing errors and confusion over their tax returns. However, understanding the tax laws and practices as well as the potential benefits can significantly affect the amount of taxes a taxpayer owes. One of the ways to reduce the amount of taxes owed is through tax credits. Tax credits are a dollar-for-dollar reduction in the amount of tax owed or a refundable amount of money if the credit exceeds the amount of tax owed. Read on to learn more about the common tax credits available in the US.
Child Tax Credit: This credit is intended for taxpayers with qualifying children under the age of 17. For Taxpayers earning less than $200,000 ($400,000 for joint filers), they can take up to a $2,000 credit per child. For those taxpayers who earn more, the child tax credit is limited. Depending on your level of income a portion of the credit is refundable, which means taxpayers can receive a refund, even if they don’t owe taxes.
Earned Income Tax Credit: It is a tax credit for low to moderate-income taxpayers. Single or married taxpayers can be considered for the credit, and the amount depends on the income and number of dependent children. Taxpayers can receive up to $7,430in 2023. For those who file jointly, the credit is not available if their Adjusted Gross Income (AGI) exceeds $63,398. If the taxpayer qualifies for the Earned Income Tax Credit, the credit reduces the amount of taxes owed, and the remaining amount is refundable.
American Opportunity Tax Credit: For taxpayers who are enrolled in qualifying tuition and education expenses can claim this credit on their tax return. The American Opportunity Tax Credit can be up to $2,500 per student for the first four years of college; apportion of this credit is refundable. To qualify, the student must not have any felony drug convictions and be enrolled at least half-time at school seeking a postsecondary school degree.
Lifetime Learning Credit: This credit is available for tuition and education expenses for taxpayers, and No limit applies to the number of years qualifying students can claim the credit. The credit’s maximum amount is 20% of $10,000 in qualifying education expenses, totaling a maximum of $2,000. Taxpayers can claim this credit regardless of the number of years of education completed.
Retirement Savings Contribution Credit: It is a non-refundable tax credit available to eligible individuals who contribute to a qualified retirement savings plan, such as an IRA, 401(k), or other forms of qualified retirement savings plans. Depending on the taxable income, the tax credit value can range from 10% to 50% of the amount contributed, with a maximum eligible contribution of $2,000. For those who file jointly, the credit is not available if their Adjusted Gross Income (AGI) exceeds $180,000.
Tax credits can significantly help taxpayers save on taxes. These credits can reduce the amount of taxes owed to the government, provide refundable amounts, and ease the burden of tax liabilities. However, these tax credits aren’t straightforward, and understanding the term and tax laws related to qualifying them requires research and analysis. We encourage taxpayers to consult with a professional, such as an accountant, to discuss their financial situation, determine which tax credits apply to them, and maximize their savings. You got this!