Why are tax deductions and tax credits important? A tax deduction can lower your taxable income and reduce your tax liability. The lower your taxable income, the lower your tax bill. Similarly, a tax credit can also lower your tax bill. A tax credit is a reduction in your actual tax bill. Here are some tax credit tips that you may find helpful.
Earned Income Tax Credit (EITC)
The EITC is determined by income and is phased in according to filing status. Eligibility and amount are based on your adjusted gross income, earned income, and investment income. To qualify for the EITC, you must:
- Have an AGI in a qualifying level. Tap to see the IRS AGI chart for EITC for the tax year 2022.
- Have investment income of less than $10,300 in the tax year 2022.
- Have a valid social security number by the due date of your 2022 return.
- Be a U.S. citizen or a resident alien all year.
- Not filed Form 2555, Foreign Earned Income.
- Meet certain rules if you are separated from your spouse and not filing a joint tax return.
Child Tax Credit
The Child Tax Credit (CTC) is designed to help families manage the cost of raising children. Under the current law, CTC is worth up to $2,000 per eligible child (under age 17 at the end of the tax year). Tap to read who qualifies and how to claim this credit according to the IRS.
Child and Dependent Care Tax Credit
If you pay someone to care for your children or another person in your household while you work, you may be eligible for the child and dependent care credit. Your child and dependent care expenses must be for the care of one or more qualifying persons. If eligible, this credit can also help reduce your tax bill. This credit is also based on your AGI. IRS Publication 503 explains in great detail who can claim the credit, as well as how to figure the credit.
Education Tax Credits and Deductions
Lifetime Learning Credit
The Lifetime Learning Credit (LLC) is for qualified tuition and related expenses paid for eligible students enrolled in an eligible education institution. This credit can help pay for undergraduate, graduate, and professional degree courses. There’s no limit to the number of years you can claim this credit, which is worth up to $2,000 per tax return. To claim the LLC, you must meet the following:
- Pay qualified education expenses for higher education.
- Pay education expenses for an eligible student enrolled at an eligible education institution.
- The eligible student is yourself, your spouse, or a dependent you listed on your tax return.
American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC) is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. You can get a maximum annual credit of $2,500 per eligible student. To be eligible, the student must:
- Be pursuing a degree or other recognized education credential
- Be enrolled at least half-time for at least one academic period beginning in the tax year
- Not have finished the first four years of higher education at the beginning of the tax year
- Not have claimed the AOTC or the former Hope credit for more than four tax years
- Not have any felony drug conviction at the end of the year
- Be within the income limits
Learn more about tax benefits for education in IRS Publication 970.
Premium Tax Credit
The Premium Tax Credit (PTC) is a type of health insurance subsidy that refunds your payments for health insurance premiums. To be eligible, your projected household income must be between 100% and 400% of the federal poverty line for your family size. Tap to learn more about eligibility for the PTC.
Clean Energy Tax Credits
Homeowners may be eligible for tax credits for certain expenditures for energy and other efficient appliances and products. Products eligible for tax credits may include home clean energy products, heating, cooling, water heating, and other energy efficiency upgrades. Tap for IRS details on credits for energy-efficient home improvements.
This is just a sampling of some of the many tax credits that taxpayers can take advantage of. Check the IRS website to learn more about other tax credits to help you reduce your tax bill. If you enjoyed our tax credit tips to lower your tax bill, you may want to read our “2 Tips to Pay Off Credit Card Debt as Rates Rise.”