Top 5 Tax Credits To Claim in 2021
Posted: April 8, 2021 in Achieving Financial Goals
When you file in 2021, you can maximize your refund or reduce what you owe with the 2020 tax credits you claim. The top five credits are either refundable or nonrefundable, and each has its own criteria for qualification. Understanding the differences between them can reduce the chance of filing mistakes and ensure that the necessary claim form is included with your tax return.
Nonrefundable Versus Refundable Credits
A nonrefundable tax credit reduces the amount of tax owed; it generally matches what a taxpayer owes dollar for dollar. For example, a tax credit worth $10 reduces a filer's liability by $10. If $5 is owed, the filer won't receive a credit or refund for the other half. A refundable tax credit, however, can reduce the amount of tax owed and also provide a refund if the credit is worth more than the tax liability. If a credit is worth $10 and the tax liability is $5, the taxpayer receives a $5 refund.
1. Adoption Credit
A tax credit of up to $14,300 is available to individuals and married couples who successfully adopted a child during 2020. By filing Form 8839, tax filers can deduct qualified adoption expenses, such as traveling and legal fees, from the tax amount owed. If adoption expenses were more than $14,300, the filer can carry over the excess amount for up to five years of filings.
2. Child and Dependent Care Tax Credit
Employed individuals may require a caretaker if they have children or a dependent family member in their household. If a person made payments to an individual or organization for caretaking services, he or she can deduct up to $2,000 per child or $500 for a disabled family member with Form 2441. Income limits, however, are a qualification factor.
3. Earned Income Tax Credit
The EITC became part of the U.S. tax law in 1975 as an anti-poverty measure. The maximum refund amount a filer can claim for the tax year 2020 is $6,660 based on the number of children in the household. Single individuals without children may also qualify for the EITC if they earned less than $15,820. Because the pandemic resulted in lost jobs or reduced hours, filers can claim the EITC based on either their 2019 or 2020 earnings so that they can receive a larger refund.
4. Saver's Credit / Retirement Savings Contributions Credit
Individuals who contributed to a qualifying retirement plan, such as an IRA, 401(k) or a health savings account, may claim the Saver's Credit. Single filers may claim a refundable tax credit of up to $1,000 after contributing $2,000 to a qualified account during 2020. Married couples filing jointly may claim a refundable credit of up to $2,000 if they contributed $4,000 in 2020. Qualified plans include 401(k)s, IRAs and ABLE accounts for disabled individuals.
5. American Opportunity Tax Credit
Students can claim costs for higher education from a qualified college or university by filing Form 8863. They can also deduct expenses such as tuition, books and library fees for the year in which they were paid, even if paid through student loans. The AOTC is a combination of nonrefundable and refundable credits; up to $2,500 can be claimed as a nonrefundable credit to offset a tax liability. After reducing an eligible filer's liability, they may receive up to $1,000 as a refund. Individual filers may not know they qualify for a credit and overlook a legitimate claim when submitting their income tax returns. Most tax credits require filling out a specific form in addition to Form 1040, which may account for filers remaining unaware of the credits they’re entitled to. If you think you might be missing out on a potential tax credit or refund, it can be worth the time and effort to learn more about what you may be entitled to at www.irs.gov.
This information is general in nature and is not intended as tax advice.
Sources:
“Education Credits: Questions and Answers.” Internal Revenue Service, 2021, www.irs.gov/credits-deductions/individuals/education-credits-questions-and-answers.
“Earned Income and Earned Income Tax Credit (EITC) Tables.” Internal Revenue Service, 2021, www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/earned-income-and-earned-income-tax-credit-eitc-tables.
“Earned Income Tax Credit (EITC).” Internal Revenue Service, 2021, www.irs.gov/credits-deductions/individuals/earned-income-tax-credit-eitc.
“Publication 503 (2020), Child and Dependent Care Expenses.” Internal Revenue Service, 2021, www.irs.gov/publications/p503.
“Retirement Savings Contributions Savers Credit: Internal Revenue Service.” Retirement Savings Contributions Savers Credit | Internal Revenue Service, 2020, www.irs.gov/retirement-plans/plan-participant-employee/retirement-savings-contributions-savers-credit.
“Topic No. 607 Adoption Credit and Adoption Assistance Programs.” Internal Revenue Service, 2021, www.irs.gov/taxtopics/tc607.
“Welcome to Benefits.gov.” Welcome to Benefits.gov | Benefits.gov, 2021, www.benefits.gov/benefit/5938.
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