Ah, tax credits, how we love thee.
Though they’re often difficult to qualify for, credits are the best out of the three tax benefits (exemptions, deductions and credits). It’s important to know what, if any, credits you might qualify for.
This is the final installment of our series on tax benefits. Don’t miss our previous articles on exemptions and deductions!
What is a tax credit
Credits are often considered the holy grail of taxes. Unlike exemptions and deductions, which work in a roundabout way of lowering your total income, to then lower the amount you pay. Tax credits are much more straightforward. They are a direct reduction of the taxes that you have to pay. So, if you get a $1000 tax credit, it’s $1000, no IRS shenanigans here!
Granted, it’s not all sunshine and rainbows. Most tax credits “phase out” or rather, decrease in value depending on certain factors. These “factors” could mean your income level, filing status, how many dependents you’ve claimed and even your age.
Let’s look at a few of the best tax credits you can take advantage of.
Did you know? Some tax credits are considered refundable. This means if your deductions and credits bring your taxes down to zero, they’ll send you a check in the mail for a percent of the credit. Woo, money!
Child tax credit
This one is sweet and simple to help people handle the income burden of raising children. Hey, sometimes you can profit off of your kids! With a $2,000 tax credit, each, to be exact. Not only that, every non-child dependent you care for will net you a cool $500 as well. Not too shabby!
Child & dependent care credit
Not to be confused with the similarly named child tax credit. This one applies to any care necessary for your children / dependents. Of which includes costs for special needs, daycare and/or social services.
The care credit will range anywhere from 20% to 35% of $3,000 that you’ve spent on said services. As your income raises, this amount will slowly phase out until you no longer qualify for anything.
- Starts at 35% for people making under $15,000
- Lowers by 1% for every $2,000 over $15,000
- 2 or more dependents raises your credit to $6,000
Green energy and sustainability is all the rage now days. Largely in part because of the hefty tax credits you can receive for being environmentally conscious.
Plug-in Electric Drive Vehicle Credit
If you like buying brand new cars (used cars don’t qualify), getting an electric could net you a tax credit ranging from $2,500, all the way up to $7,500.
The “phase out” for this credit depends on the manufacturer of the vehicle, size of the battery, and how efficient it is.
Residential Energy Efficient Property Credit
As solar panels are becoming more efficient, and thus, cheaper, we’re starting to see widespread use in homes and businesses. If you choose to go solar, you could see a tax credit as high as 30% of the total cost for choosing solar.
It’s not just for energy either! Solar heating, and geothermal heating provide similar tax credits as well.
What’s better than a nice big investment? Tax credits from your investments of course!
You can see a credit of up to $2,000 (or $4,000 if married) for investing in an IRA, 401(k), or pretty much any other retirement accounts available. Make sure to check it out if you’re contributing to a 401(k).
Saving money for investing money, how can you beat that?
We all know how ridiculously expensive college is getting. That’s why there’s some useful student credits you can likely take advantage of.
Lifetime Learning Credit (LLC)
The LLC is very popular because of how easy it is to qualify for. What’s so great about it? Well, you can get a tax credit up to $2,000, every year, for educational expenses. This includes both full time students, part time, and even people just taking a few courses to improve their job.
The LLC will phase out if your income is between $56,000 and $66,000, or between $112k and $132k if married.
Keep in mind, if you make more than $66k / $132k you won’t be able to claim this credit.
American Opportunity Tax Credit (AOTC)
The AOTC is another student oriented tax credit, it works very similar to the previously mentioned LLC, though there is a key difference.
The AOTC has a higher phase out income level at $90,000 ($180k if married). Your tax credit can be up to $2,500. If the credit brings the taxes you owe down to 0, you can up to 40% ($1,000) refunded back to you. This means you get a $1,000 check in the mail from the IRS.
Those are big differences, though there are quite a few other small changes as well. You can find a detailed comparison of these two credits from the IRS, right here.
The IRS has a handy calculator students can use to determine if you qualify for any educational credits. Check it out!
Taxes suck, but at least we can make them a little less awful by learning how you can save your money. It’s fairly common for people to qualify for at least a few different credits. Take a little time and do some digging to find out just how much you can save during tax time!
We’ll even get you started. Learn about the two siblings of tax credits, Deductions and Exemptions.
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We’re not tax specialists, nor are we trying to be! This article is purely for educational purposes and should not be treated as professional guidance. Taxes are extremely complicated and different for every individual. Always consult with a tax professional before messing with your taxes.