Tax credits differ from tax deductions. Tax deductions reduce your taxable income, saving you only a percentage on your taxes. For example, if you have a 21 percent effective tax rate, every $100 you deduct off your taxable income saves you $21 in taxes. A tax credit comes off your taxes. If you owe $10,000 in taxes and get a $1,000 tax credit, you pay only $9,000. Many taxpayers take advantage of deductions but forget about tax credits.
Earned Income Tax Credit
Low-income workers may qualify for the earned income tax credit. The purpose of this credit is to offset Social Security and Medicare taxes for low-income workers. Your income level determines whether you qualify for the earned income tax credit. Those making up to $13,440 ($18,440 if married filing jointly) with no qualifying children can claim this credit. So can a married couple with one qualifying child who earn up to $35,463 ($40,463 if married filing jointly). Married people with two qualifying children qualify if they earn up to $40,295 ($45,295 if married filing jointly). Married couples with more than two qualifying children can earn up to $43,279 ($48,279 if married filing jointly).
Child Tax Credit
You receive a tax credit of $1,000 per qualifying child. This is a non-refundable tax credit, which means you will not receive a refund if the credit makes your tax liability less than zero. A “qualifying child” is the taxpayer's child or stepchild, foster child, sibling or step-sibling, or a descendant of one of these who lives with the taxpayer more than half the year. The child must be under 19, or under 24 if attending college full-time for at least five months of the year. A child of any age who is permanently and totally disabled also qualifies. A qualifying child must not have provided more than half of his own support during the year.
American Opportunity Credit
This credit offsets the cost of higher education. You can claim 100 percent of the first $2,000 and 25 percent of the next $2,000 per student. This applies only to tuition and related fees and not expenses such as books. You can claim up to $2,500 for each student. The credit applies to students who are in their first four years of college. You can claim this credit each year for four years.
Child and Dependent Care Tax Credit
Working parents who must pay for the care of a dependent can claim the child and dependent care tax credit. The purpose of the care must be so that you can go to work. You receive a credit of $3,000 for one dependent who needs care and up to $6,000 for two or more dependents. This credit goes down by 1 percent for each $2,000 that your adjusted gross income exceeds $15,000 but cannot go down below 20 percent of your dependent care expenses.
- 1040.com: Tax Credits
- TaxCreditsForWorkingFamilies.org: Welcome to Tax Credits for Working Families
- IRS.gov: Tax Topics - Tax Credits
- EnergyStar.gov: Federal Tax Credits for Consumer Energy Efficiency
- HRBlock.com: Tax Tips & Calculators
- LATimes.com: 20 Frequently Overlooked Tax Savings
- 20SomethingFinance.com: What is the Child Tax Credit?
- IRS.gov: A “Qualifying Child”
Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.