Tax Credits? Yes Please!
No one wants to pay more taxes than they have just have to and we agree with that sentiment! This week we will be discussing tax credits.
What is a Tax Credit?
A tax credit should not be confused with the tax deductions that we discussed last week. So, what is it then? Well, the easiest way is to think of it like a pre-paid discount card that can only be used at the IRS on your taxes. Let’s look at an example. We will say that it has been calculated that you owe $10,000 in taxes for 2017. But, when we look at the tax credits allowed, which we will discuss below, we notice that you qualify for the earned income tax credit (EITC) full tax credit amount of $6,318. This would mean that you would after your credit was applied only owe $3,682 ($10,000 – $6,318 = $3,682) in taxes. Hopefully, it is now apparent that a tax credit is used to reduce the total tax you owe after your tax amount has been determined.
What Tax Credits Are Commonly Available?
Earned Income Tax Credits (EITC) is commonly just called Earned Income in a nutshell is a credit that has been designed to help those with low to moderate income. The goal of this credit is to reward working and encourage those who have low income to continue to work. EITC increases with every dollar earned until it reaches its maximum dollar amount or the individual earns more than the EITC income cap. The rules and regulations of this credit are complicated. Only a tax professional should determine if and how much of this credit you qualify for on your taxes.
Child & Dependent Care Credit is one that may be available if you paid someone to watch your child, dependent or spouse in the last year. This credit is only available if you paid someone to watch your child so that the income earners in your house could work. This would not apply to mommy’s day out if Mom is a stay at home Mom or similarly a stay at home Dad. The one exclusion to this would be if you file your return as married filing separately you cannot claim this credit.
Adoption Credit is a tax credit that is available to adoptive parents that help encourage adoption. This credit is based on the funds paid to complete an adoption. It utilizes the costs of adoption such as adoption fees, court / attorney/legal fees and traveling expenses. The credit amount that can be used is determined by the IRS each year. It is important to note that if you adopt two children then you may double this limit. Documentation is required by the government unless you are adopting a special needs child. The IRS allows for the full deduction amount to be claimed if your child qualifies by your state as being “special needs.”
Hope Scholarship Credit is probably the most well-known of all the tax credits for many. This credit is available to individuals who have expenses that are related to the first two years of college. For a student to claim this credit they must attend school at least part-time. The IRS increased the amount which can be claimed in 2017 to $2,000. There are exclusions, such as not being convicted of a felony drug offense to be able to claim the credit or claim the Lifetime Learning Credit in the same year.
Lifetime Learning Credit is a tax credit that can be claimed if a student has incurred education expenses. This means that if you are a student with limited resources and have had to pay for tuition or other educational expenses beyond what was paid for by scholarships or student loans/subsidies then you may qualify for this credit. The credit was designed to aid low to moderate income households and the credit is determined as a percentage of the expenses that you paid out of pocket up to $10,000 in qualifying expenses. It is most commonly used after the second year of college because the Hope Scholarship Credit is no longer available. Documentation is required by the IRS.