As the year draws to a close, savvy taxpayers know it's time to start thinking about maximizing their tax credits. These valuable tools can significantly reduce your tax liability, potentially leading to a larger refund or a smaller tax bill.
“A tax credit is a dollar-for-dollar amount taxpayers claim on their tax return to reduce the income tax they owe. Eligible taxpayers can use them to reduce their tax bill and potentially increase their refund,” explains the Internal Revenue Service (IRS).
A couple of key things to keep in mind regarding tax credits:
- Some tax credits are refundable. If a taxpayer’s bill is less than the amount of refundable credit, they can get the difference back in their refund.
- Some taxpayers who aren’t required to file may still want to do so to claim refundable credits.
- Not all tax credits are refundable. For nonrefundable tax credits, once a taxpayer’s liability is zero, the taxpayer won’t get any leftover amount back as a refund.
“There is a wide array of tax credits, and the amount and types may vary each tax year,” advises tax professional Steve Powell of Texas-based Powell Tax Law.
Let’s explore some of the most important tax credits you shouldn't overlook, including recent changes, eligibility criteria, and strategies for making the most of these opportunities.
Child Tax Credit: A Significant Benefit for Families
The Child Tax Credit (CTC) has undergone several changes in recent years, making it more beneficial for many families.
“The Child Tax Credit is one of the nation’s strongest tools to provide tens of millions of families with some support and breathing room while raising children,” explains The White House Child Tax Credit website. “It has also been shown to be one of the most effective tools ever for lowering child poverty. Enacted in 1997, the credit currently provides up to $2,000 per child to about 40 million families every year.”
As of 2023, the credit is worth up to $2,000 per qualifying child under the age of 17. Up to $1,600 of this credit is refundable, meaning you can receive it even if you don't owe any taxes. This refundable portion of the CTC is referred to as the Additional Child Tax Credit (ACTC) and can be found on Schedule 8812 which is used to file for the CTC.
To claim the CTC, your child must:
- Be a U.S. citizen under age 17.
- Have a Social Security number.
- Be claimed as a dependent on the taxpayer’s tax return.
The credit begins to phase out for single filers with a modified adjusted gross income (MAGI) above $200,000 and for married couples filing jointly with a MAGI above $400,000.
It's worth noting that the expanded CTC implemented during the COVID-19 pandemic, which provided higher credit amounts and full refundability, has expired. However, the current CTC still offers significant benefits for eligible families.
Credit for Other Dependents (ODC): Beginning with tax year 2018 and through tax year 2025, you may be able to claim ODC, a nonrefundable credit for each eligible dependent who can't be claimed for the child tax credit. The ODC is a non-refundable tax credit up to $500 per qualifying person who must be a dependent claimed on your return, cannot be claimed for the CTC/ACTC. The ODC can be a U.S. citizen, U.S. national, or U.S. resident alien, and do not need a Social Security number.
Education Credits: Investing in Your Future
If you or your dependents are pursuing higher education, don't overlook these valuable education credits:
- American Opportunity Tax Credit (AOTC): This credit is worth up to $2,500 per eligible student for the first four years of higher education. The amount of the credit is 100 percent of the first $2,000 and 25 percent of the next $2,000 of qualified education expenses a taxpayer paid for each eligible student. To qualify, the student must be pursuing a degree or credential and be enrolled at least half-time. The credit is partially refundable, with up to 40 percent of the credit ($1,000 max) available even if you don't owe taxes. To claim the full credit, a taxpayer’s income must be $80,000 or less ($160,000 or less for married filing jointly). The credit phases out entirely for taxpayers with income over $90,000 ($180,000 for joint filers).
- Lifetime Learning Credit (LLC): Unlike the AOTC, the LLC has no limit on the number of years you can claim it. Worth up to $2,000 per tax return (not per student), this credit is available for undergraduate, graduate, and professional degree courses, including courses to acquire or improve job skills. There's no minimum enrollment requirement, making it ideal for part-time and non-traditional students.
To claim these credits, you'll need to file Form 8863 with your tax return. Keep in mind that you can't claim both the AOTC and LLC for the same student in the same year, so calculate which one provides the greater benefit.
Other Education-Related Tax Benefits: Check out the IRS publication 970 for nine other types of education-related benefits which can reduce the amount of income tax you may have to pay, including:
- Deduct student loan interest.
- Receive tax-free treatment of canceled student loans.
- Receive tax-free student loan repayment assistance.
- Establish and contribute to a Coverdell education savings account (ESA), which features tax-free earnings.
- Participate in a qualified tuition program (QTP), which features tax-free earnings.
- Take an early distribution from any type of individual retirement arrangement (IRA) for education costs without paying the 10 percent additional tax on early distributions.
- Cash in savings bonds for education costs without having to pay tax on the interest.
- Receive tax-free education benefits from your employer.
- Claim a business deduction for work-related education.
Earned Income Tax Credit: May Put Money in Your Pocket
The Earned Income Tax Credit (EITC) is a refundable tax for moderate- and low-income taxpayers.
“The IRS estimates four out of five workers claim the EITC, which means millions of taxpayers are putting EITC dollars to work for them. Unfortunately, there are millions of workers who qualify but don't claim the EITC - missing out on thousands of dollars every year,” explains the IRS.
The IRS says that those missing out on the EITC include workers who are:
- Grandparents raising their grandchildren.
- Native Americans.
- Veterans.
- Self-employed.
- Without a qualifying child
- Recently divorced, unemployed or experienced other changes to their marital, financial or parental status.
- Below the filing requirement with earnings.
- Not proficient in English.
- Living in rural areas.
- Receiving certain disability pensions or have children with disabilities.
The amount of the credit varies based on income, filing status, and number of children. For the 2024 tax year, the maximum credit ranges from $632 for taxpayers with no children to $7,830 for those with three or more children.
Types of income earned that may help a taxpayer qualify for the EITC include:
- Wages, salary or tips where federal income taxes are withheld on Form W-2, box 1.
- Income from a job where your employer didn’t withhold tax (such as gig economy work) including:
- Driving a car for booked rides or deliveries.
- Running errands or doing tasks.
- Selling goods online.
- Providing creative or professional services.
- Providing other temporary, on-demand or freelance work.
- Money made from self-employment, including if you:
- Own or operate a business or farm.
- Are a minister or member of a religious order.
- Are a statutory employee and have income.
- Benefits from a union strike.
- Certain disability benefits you got before you were the minimum retirement age.
- Nontaxable Combat Pay (Form W-2, box 12 with code Q)
- If you claim nontaxable combat pay as earned income, it may increase or decrease the amount of your EITC. For more information, see Publication 3, Armed Forces' Tax Guide.
Other Important Tax Credits
Here are some other tax credits you should know about:
- Retirement Savings Contributions Credit (Saver's Credit): If you're saving for retirement, this credit could provide an extra incentive. Worth up to $1,000 for single filers and $2,000 for married couples filing jointly, the Saver's Credit is available to low and moderate-income taxpayers who contribute to IRAs, 401(k)s, and other qualified retirement plans.
- Energy-Efficient Home Improvement Credits: With the passage of the Inflation Reduction Act in 2022, several energy-related tax credits have been expanded or introduced. These include credits for installing energy-efficient windows, doors, insulation, skylights, heating/cooling systems, water heaters, furnaces, boilers, heat pumps, biomass stoves, as well as credits for home energy audits. The amount of credit you can take is a percentage of the total improvement expenses in the year of installation. For 2023 through 2032 the amount is 30 percent, up to a max of $1,200 (heat pumps, biomass stoves and boilers have a separate annual credit limit of $2,000) with no lifetime limit.
- Residential Clean Energy Credit: Similar to the Energy Efficient Home Improvement Credit, this credit may be for qualified expenses such as:
- Solar, wind and geothermal power generation.
- Solar water heaters.
- Fuel cells.
- Battery storage.
The amount of credit you can take is a percentage of the total improvement expenses in the year of installation. For 2022 to 2032, the credit is 30 percent with no annual or maximum or lifetime limit.
- New Clean Vehicle Tax Credit: If you place in service a new plug-in electric vehicle (EV) in 2023 or after, you may qualify for a Clean Vehicle Tax Credit. The credit may be up to $7,500 depending on your income and other qualifications.
- Premium Tax Credit (PTC): This is a refundable credit that helps eligible individuals and families cover the premiums for their health insurance purchased through the Health Insurance Marketplace. Use Form 8962 for this tax credit.
Former Tax Credits No Longer Available
It's important to be aware that some previously available tax credits have been discontinued or allowed to expire. For example:
- The Adoption Credit, while still available, is no longer refundable as it was in 2010 and 2011.
- The First-Time Homebuyer Credit, which was available for homes purchased between 2008 and 2010, is no longer offered.
- The Residential Energy Efficiency Property Credit for solar electric and solar water heating property expired at the end of 2021, although it has been replaced by the Residential Clean Energy Credit.
While these specific credits may no longer be available, it's always worth checking for new or expanded credits that might apply to your situation. Tax laws change frequently, and new opportunities may arise.
Strategies for Maximizing Tax Credits
To make the most of available tax credits, consider the following strategies:
- Keep Detailed Records: Maintain documentation of expenses that might qualify for tax credits. This includes receipts for educational expenses, energy-efficient home improvements, and childcare costs.
- Plan Your Timing: Some credits have annual limits or are based on expenses paid within the calendar year. Consider timing major purchases or payments to maximize your credits.
- Check Your Eligibility Annually: Your eligibility for certain credits may change from year to year based on income, family size, or other factors. Review the criteria each year to ensure you're claiming all credits you're entitled to.
- Consider Professional Advice: Tax laws can be complex and change frequently. Consulting with a tax professional such as Powell Tax Law can help ensure you're taking advantage of all available credits and avoiding potential pitfalls.
- Look for State-specific Credits: In addition to federal tax credits, many states offer their own credits. Research what's available in your state to maximize your overall tax savings.
As we approach the end of the year, taking the time to review and understand available tax credits can lead to significant savings on your tax bill. From the child tax credits to education credits and energy-efficient home improvements, there are numerous opportunities to reduce your tax liability.
Reach out to Powell Tax Law today for help with maximizing your end-of-the-year tax credits and other issues relating to the IRS.