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For most of you, tax credits are always a major interest when it comes to filing tax returns. The reason for their existence is that credits are generally designed to encourage or reward certain types of behavior that are considered beneficial to the economy, the environment or to further any other purpose the government deems important. In most cases, credits cover expenses you pay during the year and have requirements you must satisfy before you can claim them.
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Unlike deductions and exemptions, which reduce the amount of taxable income, tax credits reduce the actual amount of tax owed.
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- Tax credits can be categorized as follows:
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Nonrefundable tax credits are items directly deducted from the tax liability until the tax liability equals $0. Any excess nonrefundable tax credit is not utilized (by giving the taxpayer a refund, for example), as any amount that would potentially reduce the tax liability further is not paid out.
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Refundable tax credits are the most beneficial credits, as they are entirely refundable. This indicates that, regardless of a taxpayer’s income or tax liability, he is entitled to the entire amount of the credit. This is true even if the refundable tax credit reduces the tax liability below $0. In that situation, the taxpayer is due a refund.
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Partially refundable tax credits can both decrease taxable income and lower tax liability. An example of a partially refundable tax credit is the American Opportunity Tax Credit, which remains in place from 2018 on under the new tax legislation. If a taxpayer reduces his tax liability to $0 before using the entire portion of the $2,500 tax deduction, the remainder may be taken as a refundable credit up to the lesser of 40% of the credit or $1,000.
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Individual tax credits cover a wide range of expenses and domains; this newsletter is intended to brief you on the most common tax credits available for your 2017 tax returns.
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Family and Dependents Tax Credits
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The Earned Income Tax Credit, EITC or EIC, is a benefit for working people with low to moderate income. To qualify, you must meet certain requirements and file a tax return, even if you do not owe any tax or are not required to file.
To qualify for EITC you must have earned income from working for someone or from running or owning a business or farm and meet basic rules. And, you must either meet additional rules for workers without a qualifying child or have a child that meets all the qualifying child rules for you. |
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| The maximum amount of credit for tax year 2017 is: |
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$6,318 with three or more qualifying children;
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$5,616 with two qualifying children;
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$3,400 with one qualifying child;
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$510 with no qualifying children. |
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The Child and Dependent Tax Credit is a credit for the costs of care for a qualifying individual to allow you to work or look for work. The dollar limit on the amount of the expenses you can use to figure the credit is $3,000 for the care of one qualifying individual or $6,000 for two or more qualifying individuals. The amount of your credit is between 20 and 35 percent of your allowable expenses. The percentage you use depends on the amount of your adjusted gross income.
The Adoption Credit is a nonrefundable tax credit for qualified adoption expenses paid to adopt an eligible child. The credit may be allowed for the adoption of a child with special needs, even if you do not have any qualified expenses. For 2017, the credit is reduced if your modified adjusted gross income (MAGI) falls between $203,541 and $243,539; the credit is eliminated if your MAGI is $243,540 or more. In addition, there is an income exclusion for employer-provided adoption assistance.
The Child Tax Credit is a tax credit of up to $1,000 per qualifying child. If you claim the nonrefundable child tax credit but do not qualify for the full amount, you may also be able to take the refundable additional child tax credit. You must meet various criteria regarding the qualifying child. |
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| The Credit for the Elderly or the Disabled is a credit for taxpayers aged 65 or older OR retired on permanent and total disability and received taxable disability income for the tax year; AND with an adjusted gross income OR the total of nontaxable Social Security, pensions annuities or disability income under specific limits. The credit ranges between $3,750 and $7,500. |
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Education Tax Credits
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| The Lifetime Learning Credit is a credit for up to $2,000 per year to pay for qualified tuition and required enrollment fees at an eligible educational institution for you, your spouse or a dependent, if your modified adjusted gross income (MAGI) is $65,000 or less ($130,000 or less for married filing jointly). You cannot claim this credit for a student, if you claimed the American Opportunity Tax Credit for that student. |
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| To claim a LLC, you must meet all three of the following: |
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You, your dependent or a third party pay qualified education expenses for higher education,
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You, your dependent or a third party pay the education expenses for an eligible student enrolled at an eligible educational institution, and
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The eligible student is yourself, your spouse or a dependent you listed on your tax return.
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The American Opportunity Tax Credit is a credit for tuition, required enrollment fees and course material for the first four years of post-secondary education for up to $2,500 per eligible student per year. Your modified adjusted gross income (MAGI) must be under $90,000 ($180,000 for joint filers) and you must not have claimed the AOTC or the former Hope Credit for more than four tax years for the same eligible student. Forty percent of this credit may be refundable.
The amount of the credit is 100 percent of the first $2,000 of qualified education expenses you paid for each eligible student and 25 percent of the next $2,000 of qualified education expenses you paid for that student. But, if the credit pays your tax down to zero, you can have 40 percent of the remaining amount of the credit (up to $1,000) refunded to you. |
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| To be eligible for AOTC, the student must: |
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Be pursuing a degree or other recognized education credential;
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Be enrolled at least halftime for at least one academic period*beginning in the tax year;
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Not have finished the first four years of higher education at the beginning of the tax year;
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Not have claimed the AOTC or the former Hope credit for more than four tax years; |
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Not have a felony drug conviction at the end of the tax year. |
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Health Care Tax Credits
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The Premium Tax Credit – also known as PTC – is a refundable credit that helps eligible individuals and families cover the premiums for their health insurance purchased through the Health Insurance Marketplace. To get this credit, you must meet certain requirements and file a tax return.
The Health Coverage Tax Credit is a tax credit that pays 72.5 percent of qualified health insurance premiums for eligible individuals and their families. The HCTC acts as partial reimbursement for premiums paid for qualified health insurance coverage and can now be claimed for qualified coverage through 2019.
Our next newsletter will cover more tax credits of interest to you. As always, we recommend that you rely on professional advice to make sure you take advantage of all the tax credits you are entitled to. |
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