What are Tax Credits, and Which Apply to Me?
January 6, 2022:
Throughout tax season we will be posting key tax-terms to assist with your preparation conversations for your 2021 filing. Oftentimes it is easy to overlook basic terms without understanding, so we will take a look at seemingly simple as well as complex topics; mainly those that we hear annually as frequently asked questions. It is important to note that it is always best to refer to your CPA or tax professional for specific tax advice, and we are happy to collaborate with tax advisors on behalf of our clients. In this piece, we will be provide a brief summary about tax credits.
The application of tax credits for individuals and joint filers is often confused with expensing—the ability for companies to “write off” or deduct certain business expenses and investments. Similarly, a tax credit is the amount of money a filer is permitted to subtract, dollar for dollar, from any income taxes owed. Here are seven of the most commonly applied for individual and joint filers:
- Child Tax Credit: The Child Tax Credit is a refundable credit worth up to $3,000 per qualifying child between ages 6 and 17 and $3,600 per qualifying child under age 6.
- Earned Income Tax Credit (EITC): For 2021, the credit will allow taxpayers 19 and older to qualify while giving a substantial increase to the credit amount for single taxpayers. The credit ranges from $1,502 to $6,728 depending on tax-filing status, income, and number of children. Find out if you qualify by looking at the 2021 EITC tables.
- Enhanced Child and Dependent Care Credit: For 2021, the child and dependent care credit is fully refundable, and the maximum credit percentage jumps to 50%. The credit allows up to $8,000 in expenses for one child or disabled person and $16,000 for more than one. The full credit is for families making less than $125,000 a year. After that, the credit will phase out.
- Adoption Tax Credit: Families that grew through adoption might qualify for the Federal Adoption Tax Credit. Adoptive parents must earn $216,660 or less to be eligible for the full credit which provides up to $14,440 per eligible child — defined as any person under the age of 18 that is mentally or physically unable to take care of themselves.
- American Opportunity Credit: The American Opportunity Credit allows parents to claim up to $2,500 per student for tuition, activity fees, books, supplies, and equipment during the first four years of college. Students must be enrolled at least half-time.
- Lifetime Learning Credit: Congress raised the 2021 income limits for the Lifetime Learning Credit, worth as much as $2,000. The phase out now begins at $80,000 for single filers and $160,000 for joint filers for 2021. The credit can be used for tuition and related expenses paid for undergraduate, graduate, and professional degree courses for yourself, your spouse, or dependents.
- Saver’s Credit: This tax credit is worth up to $1,000 ($2,000 if married filing jointly) for mid-and low-income taxpayers who contribute to a retirement account.
A full list of credits and deductions can be found at https://www.irs.gov/credits-and-deductions. Having open conversations with your tax professional about your work, family, and investment situation will allow them to best maximize your return by knowing which credits apply to you.