In our previous blogs, we have discussed tax basics and guidelines, your filing status and its importance, all about your W-2 form, and tax deductions and its types. We sincerely hope our attempt in bringing you critical information in a simple form is helping you understand them better. For our last blog of the series, we bring you details on tax credits and their complex rules for qualification.
We all want to save money and give less in taxes, and there are many ways to make that happen. The IRS offers various tax breaks that can be availed, but only if you qualify for them. The rules for qualification can be complicated to understand, so make sure it applies to you before filing the tax return. Do not file your taxes if you are not sure, consult with a tax professional before sending your application because you do not want to get into trouble with the IRS.
What are tax credits? How are they different from tax deductions?
There is a simple difference between tax credits and tax deductions. Even though both are beneficial for you, a tax credit is better.
A tax deduction is subtracted from your gross income, and then the taxes you owe are calculated on that subtracted amount. A tax credit directly reduces your taxes. For example, you owe $1,500 in taxes, but you qualify for a $1,000 tax credit. Subtracting the tax credit from tax owed, now you need to pay only $500 in taxes.
A tax credit is simply reduced from the taxes you calculated, giving you instant relief. If your taxes owed and tax credit are equal, the difference is zero and you don’t need to pay Uncle Same anymore. But if your credit is more than the amount you owe, you may or may not get the difference in a cheque from the IRS. That depends on whether the tax credit you applied is refundable or non-refundable.
What are refundable and non-refundable tax credits?
As the name suggests, a refundable credit means the IRS pays you if your tax credits exceed your tax amount. A non-refundable credit means your taxes owed will be erased but you will not receive any cashback, and it will not be carried forward to the next year either.
Refundable credits are more beneficial, but there are only a few of them. Most tax credits are non-refundable. Let us study a few common tax credits and their qualification rules.
The Updated Earned Income Tax Credit (EITC)
This credit was introduced to help low-income and a few middle-income individuals and families. Also, this is a refundable credit. To qualify for this you must have an earned income, but not much. Your credit amount depends on your earned income and AGI (Adjusted Gross Income), and the number of dependents you have. The table below may clear things up.
|Number of Qualifying Children
|Earned Income and AGI less than
|Maximum Tax Credit Amount for the year 2018 (filing in 2019)
|Other Filing Status*
|Married and Filing Jointly
|three or more
*You cannot claim this tax credit if you are Married and Filing Separately. In the case that you are separated and your spouse did not live with you in the last six months, you can file as Head of Household status to claim this credit.
If you are into investments, your invested income should not be more than $3,500.
Qualifying Child for EITC conditions:
These are different than claiming your child as a dependent.
– The child must be related by birth, adoption, marriage or foster arrangement. Adopted children are treated the same as children by birth. The child can be your son or daughter, a stepchild, brother or sister, niece or nephew, or a foster child placed in your care by an authentic agency.
– The child must be 18 years old or less on the last day of the tax year, or 24 years old or less and a full-time student (at least 5 months in the year). If disabled, the child can be claimed as a dependent at all ages. In all cases, the child must be younger than you or your spouse (when married and filing jointly).
– The child must live with you in the US for more than 6 months of the year. They must also have a Social Security Number and other proofs of identification.
If you claim this tax credit, you will have to attach Schedule EIC with your Form 1040 to claim qualifying child(ren).
The Child Tax Credit
This tax credit was non-refundable till 2017, now it is partially refundable. The TCJA has increased the maximum credit to $2,000 per child (previously $1,000). You must have at least one qualifying child, they must be less than 17 years old on the last day of the year, they must be ‘related’ to you.
From the year 2018, only up to $1,400 of the $2,000 is refundable. This will be increased in the coming years in accordance with inflation. There are more rules that apply and affect this tax credit.
The Child Tax Credit is not for those families with too much earned income. But the TCJA has increased the upper limit of the phase-out. Since 2018, it begins at $400,000 for married taxpayers and $200,000 for all others.
The Family Tax Credit
This is a new credit created under the TCJA solely to help families with older kids. The keyword here is ‘family’. This credit also covers your parents, grandparents, sibling, aunts, and uncles – it is loosely defined as anyone of your family who qualifies can be your dependent.
But it is not that easy to qualify as a dependent. There are restrictions over income of the dependent and yours too (you cannot claim this with too much of earned income). Other conditions also need to be fulfilled.
The credit is $500 per dependent. It is a non-refundable credit, means you can use it to reduce your tax debts if it applies.
Other Popular Tax Credits
The Child and Dependent Care Credit can be claimed if you pay for a caregiver to watch over your child or a dependent who is incapable of taking care of themselves while you go to work. The credit has its limits but can help you with around 35 percent of your caregiving expenses. There are income limitations and other conditions for qualifying.
There are a few Education Tax Credits that can be availed. The American Opportunity Credit and the Lifetime Learning Credit are both valid this year. You can claim one of these in a year for one student. These can cover your education, your spouse’s or your dependent’s education. The Student Loan Interest Deduction can be claimed up to $2,500 in the interest you paid for your student loans in the tax year. There are restrictions on the qualification of every credit.
These are just a few of the tax credits. The guidelines here are in brief and you must dive into details before claiming a tax credit. We recommend gathering full knowledge or consulting a tax expert when you file your taxes.
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