It’s that dreaded time of year when we have to negotiate our taxes with Uncle Sam. I’ve yet to meet a person who likes filing their taxes, yet it is something millions of people must complete by April 15th each year. While it’s not a fun task, there are many opportunities to lower your tax liabilities thus increasing your tax returns. No, you don’t need to be a Certified Public Accountant (CPA) or even hire a CPA to do this. I’m speaking of tax credits. There are multiple different tax credits that taxpayers can use to lower their taxes. Here are the best tax credits to take advantage of right now.
What Is A Tax Credit?
In a nutshell, a tax credit reduces the amount of taxes you owe the federal government. They have the potential to increase your tax refund.
What Are The Types Of Tax Credits?
There are two types of tax credits, refundable and non-refundable. A refundable tax credit can increase your tax refund beyond what you paid in taxes for the year. For example, if you owe $500 in taxes and your applicable refundable tax credit is $700, your refund amount will be the taxes you owe of $500 plus an additional $200 from the refundable tax credit. This brings your total tax refund to $700. An example of a refundable tax credit is the Earned Income tax credit. Non-refundable on the other hand cannot increase your tax refund beyond the amount of taxes you paid. For example, if you owe $500 in taxes and your applicable tax non-refundable credit is $700, your tax refund will be $500. An example of a non-refundable tax credit is the American Opportunity Tax Credit.
Tax Credits To Take Advantage Of Now
1. Earned Income Tax Credit
The Earned Income Tax Credit is reserved for families with low to moderate income. The amount of credit that is applied depends on the eligible dependents that are included in your tax filing. Remember This is a refundable tax credit; therefore, it can increase your tax refund beyond your tax liability. The basic qualification for this credit is to have earned income less than $57,414 and investment income less than $10,000. For the 2021 tax year, the limit you can claim is $1,502 with no dependents, $3,618 with 1 dependent, $5,980 with 2 dependents and $6,728 with 3 or more dependents.
2. Child & Child Care Credit
Thanks to the American Rescue Plan Act of 2021, families can now claim more tax refund by using the Child and Dependent Care Credit. To qualify for this credit, taxpayers must have paid the expenses for the care of a qualifying individual, lived in the U.S. for more than ½ the year and have earned income (not to be confused with business/investment/passive income). The expenses you claim for this credit cannot be more than your earned income or the smaller of you and your spouse’s income. For the year 2021, taxpayers can receive up to $8,000 for one dependent and $16,000 for 2 or more dependent s [Click here for more information].
3. Education Tax Credits
If you’re in school or have dependents you can take advantage of the Education Tax Credits now. There are currently two types of education credits; the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC).
American Opportunity Tax Credit
The AOTC is for qualified education expenses paid for an eligible dependent in their first 4 years of post-secondary schooling. It’s important to remember that this credit can only be applied for 4 years. The maximum credit is $2,500 per eligible student per tax household. The IRS calculates this credit by allowing a credit of 100% for the first $2,000 of expenses and 25% of the next $2,000 ($500). To qualify, the dependent must be pursuing a degree and enrolled at least half time. Finally, to claim the credit the taxpayer must receive a 1098-T form from the college that taxpayer or the dependent attends. If your modified adjusted gross income is over $90,000 ($180,000 married filing jointly), you cannot take advantage of this credit.
Lifetime Learning Credit
The LLC is for qualified educational expenses for eligible students enrolled in an educational institution. It can be applied to undergraduate, graduate and professional courses. Unlike the AOTC, this credit can be applied multiple years over the taxpayer’s lifetime. It is however restricted to a maximum of $2,000 per tax return. To be eligible, the student must be enrolled in an educational institution for at least one academic period in the tax year. You cannot take advantage of this tax credit if your modified gross income is $69,000 ($138,000 married filing jointly). [Click here for more information].
This season be smart when filing your taxes. There are many tax strategies that you can take to maximize your tax refund. When you’re filing, keep in mind these tax credits to take advantage of now.
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