Tax season is stressful for most people. Whether you choose to file on your own or use the services of an accountant, there’s still a lot to think about. You have to organize your documents, make difficult decisions, and follow a stringent set of rules laid out by the IRS. But the good news is that most people have opportunities to save money in the form of tax credits.
5 Tax Credits You Need to Know About
Between all of the different terminology, jargon, and ever-changing tax codes, it’s not always easy to understand the best way to save money. For one, people get confused over the difference between a tax deduction and a tax credit.
Whereas a tax deduction reduces the amount of taxable income you have in a given year, tax credits are subtracted directly from a person’s tax liability. In other words, if you owe $10,000 in taxes and get a $1,000 tax credit, you only owe $9,000 when it’s all said and done. That makes tax credits exponentially more valuable.
Not sure which tax credits you qualify for (if any)? Let’s take a look at some of the most commonly used options:
1. Child Tax Credit
One of the most commonly used tax credits is the Child Tax Credit. For taxpayers who earn more than $3,000 in a year and don’t exceed adjusted gross income limits ($75,000 if filing single and $110,000 if filing jointly), you’re able to claim a tax credit of $1,000 per child until they’re 18 years old. That ends up being a pretty sizeable figure for large families.
2. American Opportunity Tax Credit
Are you familiar with the American Opportunity Tax Credit (formerly known as the Hope Scholarship)? “It enables filers to claim a tax credit for expenses related to tuition as well as certain fees and course materials expended for higher education in tax-years 2009 through 2017,” E-file.com explains. “Expenses that do not qualify for the tax deduction include room and board, travel costs and medical insurance as well as fees paid with tax-free educational assistance.”
3. Earned Income Tax Credit
Did you know that one in five people who are eligible for the Earned Income Tax Credit don’t claim it? Considering that the credit can be worth more than $6,000 for those who meet the requirement and have the lowest income, it’s a pretty costly oversight. Generally speaking, you have to work and earn less than $53,267 to meet the baseline requirement. After that, there are some other stipulations regarding how much you can get back. The average credit is right around $2,447.
4. Adoption Credit
Adoption is a wonderful thing, but many people shy away from it because of all the expenses involved. Between adoption fees, court costs, attorney fees, travel, and everything else that goes into finalizing an adoption, the cost can easily reach five figures. In order to incentivize people to adopt, the government has an adoption credit that can be worth up to $13,400 (based on expenses).
5. Savers Credit
For people with low incomes, saving for retirement can be difficult. In order to encourage these people to stash away money in interest-bearing accounts, the IRS has a Savers Credit that gives taxpayers up to $2,000 back for contributing to eligible 401(k) or IRA accounts.
Keep More of Your Money
It’s your money – so why not keep more of it? If you qualify for any of these tax credits and are leaving them on the table, then you’re probably missing out on an opportunity to save hundreds or even thousands of dollars. Spend time educating yourself on the proper way to file taxes and you’ll be able to breathe a little easier this spring.