Do you dread dealing with taxes? If so, you’re not alone. While we’re sure you want to save every dollar you can when filling out tax forms, you might feel like you can’t even begin to determine potential tax cuts when the terminology is so hard to understand. But when tax season rolls around, we’ve got your back. Keep reading for everything you need to know about tax credits and how they can help you save money. Learn how to save money on taxes and be off to a great start for the new year!
What Is a Tax Credit?
There are a lot of ways to qualify for a tax return. But a tax credit is different from a tax deduction, which is a specific amount of money that the Internal Revenue Service (IRS) takes off your taxable income. Though tax deductions will lower your tax bill, a tax credit is even more effective at bringing down the bill.
So what is a tax credit? This is an amount that is applied to your tax bill, dollar for dollar. While a tax deduction will lower your tax bill based on your reduced taxable income, a tax credit is a dollar amount directly applied to your tax bill.
How It Works
For example, if your tax bill is $500, but you get a tax credit of $1,000, you’ll get $500 back in the form of a tax return. Likewise, if your tax bill is $1,000, but you qualify for a $500 tax credit, you will owe $500 instead of $1,000. Get the idea?
As with all things relating to taxes, tax credits have many rules and regulations. But there are three categories of tax credits that are most common, which we’ll talk about in the following sections.
Child Tax Credit
If you’re a parent, you could qualify for a child tax credit. This will earn you up to $2,000 per child on your tax bill for dependents, and $500 for non-dependents. (Usually, these are older children who provide for their own basic needs.) The higher your taxable income, the less money you’ll qualify for on your child tax credit. Here are some other subcategories of the child tax credit to consider:
Child and dependent care credit: This is usually 20-35% of up to $3,000 of costs for daycare for children under 13 (or $6,000 of expenses for 2 or more dependents).
Earned income credit: You’ll get a credit of $3,461-$6,431 in 2018, depending on the number of children, marital status, and earnings.
Adoption credit: In 2018, this credit is $13,840 per adopted child.
Education/Retirement Tax Credit
There are several types of education tax credit you could qualify for. These include:
Saver’s credit: This credit is 10-50% of up to $2,000 in contributions to a retirement plan like an IRA, 401(k), or 403(b).
American opportunity credit: Students who pay school tuition or pay for books and supplies could earn up to $2,500 in credit for the first four years of college.
Lifetime learning credit: Undergraduates, graduates, and students taking non-degree courses could qualify for $2,000 in credit due to tuition, activity fees, book costs, etc.
Energy Tax Credit
If you’re making green purchases to reduce energy usage, you could qualify for this tax credit. There are two types of energy tax credits, including:
Residential energy tax credit: Earn up to 30% of the cost of solar panels, solar water heaters, or other solar energy systems installed in 2018.
Electric motor vehicle credit: Get up to $7,500 when you buy a new plug-in electric vehicle in 2018. The amount is more if the battery has a higher capacity.
Filing Your Claim
You’ll need to provide the IRS with some key information to determine if you qualify for these tax credits. Each tax credit requires slightly different records, but there are a few things that are the same no matter which type of credit you’re looking to qualify for. So before getting too far in your tax forms, make sure you have the following information:
Student enrollment status
Adjusted gross income (AGI)
Records of expenses, if applicable
Take Advantage of Your Tax Credit
If there’s any possibility you might qualify for a tax credit, you want to make sure you take advantage of the opportunity to save money on your taxes. Gathering proper records and taking the time to investigate will be well worth your time. You could end up with a greatly reduced tax bill, or even receive a nice refund check from the IRS. Make the most of your tax credits and see the difference they can make in your next tax refund.