When preparing your tax return, a tax credit is a satisfying benefit that reduces your overall tax due, unlike a deduction that only decreases the income on which you’ll be taxed.
This could mean hundreds of dollars knocked off your bill or added to your refund, as you get a 100% benefit with a tax credit. Some tax credits are specialized to incentivize specific economic activity, while others apply to a huge swath of the population.
One of the most common income tax breaks is the Earned Income Tax Credit (EITC), which helps lighten the burden for middle- and lower-income families. For the 2021 tax year, four out of five filers claimed this tax credit, with an average benefit upward of $2,000, and the total value of those credits was approximately $64 billion.
The EITC is a refundable tax credit, meaning the government will pay you the difference if the credit amount is higher than your tax owed. Eligibility for the EITC mostly depends on your income, and you must have worked to receive the credit.
Another tax credit is the Child Tax Credit (CTC) for families with children. The benefit can reach $2,000 per qualifying child; up to $1,500 is refundable.
People with dependents who don’t qualify for the full credit can be eligible for a credit of up to $500. The amount you can claim depends on your income, and the credit begins to phase out once your adjusted gross income exceeds $200,000, or $400,000 for those married filing jointly.
The American Opportunity Credit and Lifetime Learning Credit are two education-focused tax breaks that help people with expenses such as tuition. The American Opportunity Credit is targeted toward students pursuing formal degree programs, while the Lifetime Learning Credit can be used for other types of training and education.
The partially refundable American Opportunity Credit is more generous. In contrast, the nonrefundable Lifetime Learning Credit is limited to $2,000 per tax return for tuition only, regardless of how many students would be eligible. The eligibility criteria for these two education credits vary.
In summary, tax credits are beneficial as they reduce your overall tax due. It’s important to review the tax credits you may qualify for before filing your tax return, such as the Earned Income Tax Credit, Child Tax Credit, American Opportunity Credit, and Lifetime Learning Credit. Eligibility criteria for each tax credit vary, so you must ensure you meet the requirements before claiming them.
»Things not to miss when preparing your tax credit«
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