Tax Credits Worth Knowing About
A deduction reduces the income you are taxed on. A credit reduces the tax itself, dollar for dollar, and some credits pay you even when you owe nothing. Billions go unclaimed every year.
Credits Beat Deductions
A one thousand dollar deduction reduces your taxable income by a thousand, which saves you whatever your tax rate is on that amount. A one thousand dollar credit reduces your tax bill by a thousand.
Some credits are refundable, meaning if the credit exceeds what you owe, the difference is paid to you. That is why people with very low tax bills can still receive substantial refunds, and why filing matters even when you are not required to.
The Earned Income Tax Credit
The largest credit available to working people on low and moderate incomes, and consistently one of the most under-claimed. Roughly one in five eligible households does not claim it, usually because they did not file at all.
It is refundable, it scales with income and number of children, and it is available to workers without children too, at a smaller amount. Eligibility depends on earned income, filing status and investment income limits, and the thresholds change annually.
Refunds can generally be claimed for up to three prior years. Someone who was eligible and never filed can often still claim those years, which for a family can be a significant sum. This is the single most valuable paragraph on this page.
Child and Dependant Credits
The Child Tax Credit applies per qualifying child under a set age, with part of it refundable for many families. The Credit for Other Dependants covers dependants who do not qualify, including older children and supported relatives.
The Child and Dependent Care Credit offsets childcare costs that let you work, which includes daycare, after-school care and some summer camps. It requires the provider details on your return, so keep them.
The Saver’s Credit
The one almost nobody knows about. If you contribute to a retirement account and your income is below the threshold, you can receive a credit worth a percentage of what you contributed, on top of any tax benefit the contribution already carried.
It effectively means the government pays part of your retirement contribution. Most eligible people have never heard of it, and it is claimed on a single extra form.
Education Credits
The American Opportunity Tax Credit applies to the first four years of undergraduate study, is partly refundable, and is per student. The Lifetime Learning Credit is smaller, not refundable, but has no year limit and covers part-time study and job-skills courses.
You cannot claim both for the same student in the same year, and tuition paid with tax-free money does not count twice.
Others Worth Checking
- Premium Tax Credit, if you buy health cover through the marketplace.
- Energy efficiency credits for qualifying home improvements and equipment.
- Adoption credit.
- State credits, which are entirely separate and frequently missed. Several states mirror the federal EITC with an additional credit of their own.
Credits are the part of the tax system most likely to be left unclaimed, and the people most likely to miss them are the ones they were designed for. Free preparation help, covered in the next article, exists partly for this reason.