Top 5 Tax Credits To Claim
When you file, you can maximize your refund or reduce what you owe with the 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.
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.
A tax credit is available to individuals and married couples who successfully adopted a child. 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 a certain amount, the filer can carry over the excess amount for up to five years of filings.
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 a certain amount per child or for a disabled family member with Form 2441. Income limits, however, are a qualification factor.
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 is based on the number of children in the household. Single individuals without children may also qualify for the EITC if they earned less than a certain amount. Because the pandemic resulted in lost jobs or reduced hours, filers can claim the EITC based on their earnings so that they can receive a larger refund.
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 after contributing a certain amount to a qualified account during the tax year. Married couples filing jointly may claim a refundable credit too. Qualified plans include 401(k)s, IRAs and ABLE accounts for disabled individuals.
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 a certain amount can be claimed as a nonrefundable credit to offset a tax liability. After reducing an eligible filer's liability, they may receive up to a certain amount 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.