April 15 will be here before you know it, so now is the best time to start preparing. Starting early makes the process less stressful and gives you more time to find ways to lower your tax liability. And one of the best ways to do that is by claiming any tax credits you qualify for.
“With certain credits, some people will actually get rebates on their taxes,” Elijah Kovar, a partner and finance advisor with Great Waters Financial, told US News My Money.
With refundable credits, you could get money back if the amount you qualify for is larger than your tax liability. On the other hand, nonrefundable credits can eliminate your tax bill, but you won’t see a refund.
US News My Money explains the various tax credits you could potentially qualify for.
Tax Credits For Higher Education
American Opportunity Credit
According to JL Smith Group financial advisor Bryan Bibbo, “If you’re in college, there are various tax credits you could be taking advantage of.”
The American opportunity tax credit is the largest benefit. Parents of adult dependents enrolled in college can receive up to $2,500 to offset the cost of an undergraduate degree. To claim it, dependents must be registered part-time students, seeking an eligible degree, and not have received this or the Hope credit in the last four years.
The American opportunity credit is applicable for tuition and assorted costs such as textbooks. This credit is only available to joint-filers whose modified adjusted gross income falls under $180,000, or $90,000 for single-filers.
Lifetime Learning Credit
This benefit is equivalent to 20% of eligible education costs, up to $2,000 annually. To qualify, your modified adjusted gross income must be less than $138,000 if you file with a spouse, or $69,000 if you file individually. There is no limit on the number of years you can qualify for this credit, and courses can be outside of the regular college curriculum.
Tax Credits For Households
Child Tax Credit
Parents can qualify for up to $2,000 for every dependent under 17 living with them at least six months during the year with the child tax credit. “If (your child) turns 17, you get $500,” Bibbo explained. Qualifying recipients include joint-filers earning up to $400,000 annually, or $200,000 for other filers.
Child And Dependent Care Tax Credit
Working parents can offset the cost of childcare with the child and dependent care tax credit. The amount you receive is income-based, but the most you can earn is 35% of $3,000 in eligible costs for one child or $6,000 for multiple children.
According to Kovar, the adoption credit can ease legal costs and other expenses for parents trying to adopt a child. On top of a $14,300 credit for eligible adoptions, you could also exclude the same amount from your 2020 income if your employer covers approved costs.
Keep in mind that you can’t apply for both the credit and income exclusion. To qualify, your modified adjusted income for 2020 cannot exceed $214,520. The benefit tapers off based on your income, up to $254,520. While it is a nonrefundable tax credit, you can rollover the remaining credits for as long as five years.
Tax Credits For Income-Eligible Taxpayers
Earned Income Tax Credit
This refundable tax credit is available to low- and mid-income Americans. Families with at least three qualifying children can receive up to $6,660 for 2020. Joseph notes that this could help low-earning households save thousands.
Income limits are based on the number of children living in the home and vary from $15,820 for single-filers without children to $56,844 for joint-filers with three or more children. Recipients cannot qualify if they make over $3,650 from investments in the year.
Premium Tax Credit
According to US News My Money, taxpayers typically get the premium tax credit as a health insurance premium subsidy. Offered under the Affordable Care Act (ACA), this income-based, refundable credit is available to eligible families who purchase insurance through the ACA marketplace.
However, Joseph warns that individuals must submit correct information when enrolling in an ACA program. “If you make more than you initially reported, you may have to pay back some or all of the credit.”
- LaPonsie, Maryalene. “What 2020 Tax Credit Do I Qualify For?” U.S. News & World Report, U.S. News & World Report, 29 Dec. 2020, money.usnews.com/money/personal-finance/taxes/articles/what-tax-credits-do-i-qualify-for.