It’s time for another edition of #MoneyMattersMonday! The third part in our series takes a closer look at some of the most popular, money-saving personal tax credits for individuals, married couples, and parents to claim on their tax returns.
Earned Income Tax Credit
The Earned Income Tax Credit (EITC) is a federal income tax credit that earners of low to moderate incomes may qualify for when filing their tax returns. In its definition from the IRS, earned income is considered any type of income that a taxpayer makes from an outside source – such as an employer – or through running a profitable small business.
Claiming the EITC can significantly benefit taxpayers who have qualifying children because there is no age restriction for these individuals to claim the tax credit on their returns. Filers who do not have a qualifying child must be between 25 and 64 years of age to qualify for it. The only tax-filing status the credit does not cover is for taxpayers who are married and file separate returns.
Adjusted gross income (AGI), earned income, and investment income are all types of income that are factored into the equation to claim the credit.
For tax year 2015, the maximum value of the credit is up to $6,242 for working parents who have 3 or more children. Parents of one child are eligible for up to $3,359, while individuals with no children can claim up to $503 for the credit.
American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC) is an education-related tax break that can be applied to the expenses incurred during the first 4 years of which students are enrolled in higher education coursework.
A student can be an individual, an individual’s spouse, or a dependent.
The value of the American Opportunity Tax Credit is up to $2,500 per qualifying student. This amount can be claimed each year for the first 4 years of a student’s higher education. The AOTC must be applied to certain education costs, and you can’t claim it if you are already claiming another education tax credit when filing your return.
Eligible course materials covered by the credit include textbooks, supplemental course materials, school supplies, and other relevant items, along with student activity fees some colleges require for enrollment.
This tax break is available to individual taxpayers with annual modified adjusted gross incomes of up to $80,000 and $160,000 for couples who file a joint return. It is phased out for taxpayers who have higher incomes. Also, remember that 40% of this tax credit is refundable.
Lifetime Learning Credit
The Lifetime Learning Credit is an additional tax break for those pursuing higher education. It is designed to reduce a tax bill on a dollar-for-dollar basis for a percentage of higher education tuition, fees, and other necessary materials. You can claim the tax credit for yourself, your spouse, or for a dependent to attend college or a technical school. This particular credit does not cover activity or athletic fees, school-provided insurance, or room-and-board costs for students living on campus.
The value of the Lifetime Learning Credit is 20% of the first $10,000 an individual spends on coursework at a post-secondary school. Because of this math, the maximum value of the Lifetime Learning Credit is $2,000 per household on a per-taxpayer basis.
To meet this credit’s eligibility requirements, a student should be enrolled in school on a part-time or full-time basis. Plus, the credit is gradually phased out after a taxpayers modified adjusted gross income (MAGI) exceeds $55,000 and is completely phased out when this MAGI amount exceeds $65,000. For joint filers, these limits are $110,000 and $130,000, respectively.
Child and Dependent Care Credit
The Child and Dependent Care Tax Credit can help offset babysitting and daycare expenses for parents, which often add up quickly.
Eligible taxpayers include individuals who pay for childcare costs for kids under age 13 so that these parents or caregivers can either maintain employment or look for work. The credit is also available for those who take care of a spouse or dependent of any age who cannot function independently.
This tax credit can be claimed by all taxpayers other than married couples who file their taxes separately. It provides a maximum of 35 percent of qualifying childcare expenses, and this amount depends on adjusted gross income.
Child Tax Credit
As a parent or guardian, you may be eligible to earn up to $1,000 in tax credits for any children in your care. But keep in mind that you must meet certain requirements to qualify.
The child has to be younger than 17, a relative of yours, claimed as a dependent on your return, and living under your roof a certain amount of time within a given year.
Officially called the Retirement Savings Contributions Credit, the Saver’s Tax Credit applies to eligible contributions made to specific retirement plans, including a traditional 401(k) and certain investment retirement accounts.
The maximum value of the Saver’s Credit is $1,000 for single filers and $2,000 for joint tax filers. For tax year 2015, the maximum income limit for the credit is $30,500 for single filers, $45,750 for head-of-household filers, and $61,000 for joint filers. The credit is only available to taxpayers over age 18 who were not full-time students or claimed as dependents during the tax year for which the credit is applied.
Advanced Premium Tax Credit
The Advanced Premium Tax Credit is available to help taxpayers who fall below certain income limits so that they can afford to pay their health insurance premiums through the Affordable Care Act exchanges on healthcare.gov.
The value of this tax break is based on a sliding scale, which accounts for income, size of household, marital status, and other factors. After signing up for health insurance on the exchanges, the website will indicate how much your premium tax credit is worth.
Adoption Tax Credit
Adopting a child is a life-changing decision for both parents and children. But it can also be an expensive undertaking. Fortunately, the impact of these expenses can be reduced through the Adoption Tax Credit.
It is worth up to $13,400, according to total adoption expenses, which may include adoption fees, legal fees, and travel costs.