A number of federal tax credits exist to help taxpayers—primarily those in middle-income and low-income households—reduce the amount of taxes they owe or get the largest refund possible. Here are the 5 biggest tax credits you just might qualify for that can have a major impact on your income and tax situation.
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1. Earned Income Tax Credit
One of the most substantial credits for taxpayers is the Earned Income Tax Credit. Established in 1975—in part to offset the burden of Social Security taxes and to provide an incentive to work—the EITC is determined by income and is phased in according to filing status: single, married filing jointly or either of those with children. Eligibility and the amount of the credit are based on adjusted gross income, earned income, and investment income.
- For 2021, generally, a person must be at least 19 years old except that the minimum age for a former foster youth or qualified homeless youth is 18, and a specified student must be at least 24. There is no upper age limit for the 2021 tax year.
- If married, both spouses must have valid Social Security numbers and must have lived in the country for more than six months.
- If you may be claimed as a dependent on another filer's tax return, you do not qualify.
You won't qualify for the EITC if:
- You earned $10,000 or more in 2021 from your investment income. That is considered "disqualified income" and you cannot qualify for the credit.
If you're self-employed, you may qualify for the EITC. Tax experts recommend you check your eligibility every year, even if you think you won't qualify.
2. American Opportunity Tax Credit
For years, the Hope Credit helped families pay the costs of higher education. Since 2009, that credit has been rebranded and expanded as the American Opportunity Tax Credit.
- The AOTC covers four years of post-secondary education.
- The full credit is available to people whose modified adjusted gross income (MAGI) is $80,000 or less, or $160,000 or less for married couples filing jointly.
- Depending on your income (the credit drops as income increases), you may receive up to $2,500 of the cost of qualified tuition and course materials paid during the taxable year.
- The student must be enrolled at least half-time for at least one academic period.
- This credit is available on a per-student basis.
3. Lifetime Learning Credit
The Lifetime Learning Credit, also established to offset the costs of post-secondary education, differs from the American Opportunity Tax Credit in that it is available for any year of post-secondary education, not just the first four. Also, credit is available for people not pursuing a degree.
- The Lifetime Learning Credit may be as high as $2,000 per eligible student.
- For 2021 the full credit is available to eligible individual taxpayers who make $80,000 or less, or married couples filing jointly who make $160,000 or less.
- The credit phases out as income go beyond these amounts.
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4. Child and Dependent Care Credit
The Child and Dependent Care Credit helps defray the costs of babysitting or daycare. It's available to people who must pay for childcare for dependents under age 13 in order to work or look for work. The credit is also available for the cost of caring for a spouse or a dependent of any age who is physically or mentally incapable of self-care. To qualify, your filing status must be single, married filing jointly, head of household, or qualifying widow or widower with a qualifying child.
For 2020, the credit—which ranges from 20 percent to 35 percent depending on your income—can be applied to as much as $3,000 of qualifying expenses if you pay for the care of one qualifying child, or up to $6,000 if you pay for the care of two or more.
For 2021, the American Rescue Plan brings significant changes to the amount and way that the child and dependent care tax credit can be claimed. The plan increases the amount of expense eligible for the credit, relaxes the credit reduction due to income levels, and also makes it fully refundable. This means that, unlike in other years, you can still get the credit even if you don’t owe taxes.
So, for the tax year 2021 (the taxes you file in 2022):
- The amount of qualifying expenses increases from $3,000 to $8,000 for one qualifying person and from $6,000 to $16,000 for two or more qualifying individuals
- The percentage of qualifying expenses eligible for the credit increases from 35% to 50%
- The beginning of the reduction of the credit is increased from $15,000 to $125,000 of adjusted gross income (AGI).
Also for the tax year 2021, the maximum amount that can be contributed to a dependent care flexible spending account and the amount of tax-free employer-provided dependent care benefits is increased from $5,000 to $10,500.
5. Savers Tax Credit
The Savers Tax Credit, formerly the Retirement Savings Contributions Credit, is for eligible contributions to retirement plans, such as qualified investment retirement accounts, 401(k)s, and certain other retirement plans. Taxpayers with the least income qualify for the greatest credit—up to $1,000 for those filing as single, or $2,000 if filing jointly.
- For 2021 the maximum income for the Savers Tax Credit is $33,000 for single filers, $49,500 for heads of household, and $66,000 for those married and filing jointly.
- Filers must be at least 18 years old and may not have been a full-time student during the calendar year or claimed as a dependent on another person’s return.
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