A tax credit is one of the most satisfying benefits you can get when preparing your tax return.
Unlike a deduction that reduces taxable income, a tax credit reduces your total tax liability. The result could mean hundreds of dollars being deducted from your account or added to your refund.
“With a loan, you benefit 100%,” said Andrew King, vice president of tax policy and research at Goldman Sachs Ayco Personal Financial Management. “This is a full tax refund that you would otherwise have to pay.”
Some tax credits apply to a large part of the population, others specialize in stimulating specific economic activities. Before you file your tax return, there are some tax credits you should check.
Earned income tax credit
The Earned Income Tax Credit, or EITC, is one of the most common earned income tax credits designed to ease the burden on middle- and low-income families.
For the 2021 tax year, 4 out of 5 claimants claimed this tax credit with an average benefit of more than $2,000. The total value of those loans was about $64 billion, the IRS said.
Better yet, the EITC is a so-called “refundable” tax credit. This means that if the loan amount exceeds your tax liability, the state will pay you the difference.
As the name suggests, eligibility for the EITC is based primarily on your income and you must have worked to receive credit. For the 2022 tax year, income limits range from $16,480 to $59,187 depending on filing status.
There are some other requirements, including:
— You must not have more than $10,300 in investment income.
— Everyone on your tax return must have a valid BSN number.
child benefits
If you have used the Child Tax Credit (CTC) in the past, please note that this allowance has changed significantly for families with children.
During the pandemic, the government temporarily increased the loan amount, causing some families to lose thousands of extra dollars. But in 2022, credit returned to its previous level. Taxpayers who got a large refund last year thanks to the loan may be disappointed if they apply this time.
Still, the CTC can wipe out a significant portion of your tax bill. The benefit can be up to $2,000 per eligible child, of which up to $1,500 is reimbursable. Individuals with dependents who do not qualify for full credit may be eligible for a credit of up to $500.
Families with children under the age of 17 are generally eligible for the child tax credit, as long as their children have a valid social security number. However, the amount of the entitlement depends on your income.
The credit begins to expire once your adjusted gross income exceeds $200,000, or $400,000 for married couples filing together. Above a certain income level, the benefit lapses completely.
American Opportunity Credit, Lifetime Learning Credit
The American Opportunity Credit and Lifetime Learning Credit are two education-related tax credits that help people with expenses such as tuition. Both credits have a similar structure, but are tailored to different types of costs.
American Opportunity Credit is for students pursuing formal degree programs. The credit for lifelong learning, on the other hand, can be used for other forms of education and training.
The partially refundable American Opportunity Credit is also more generous: Taxpayers can claim up to $2,500 per eligible student, including for non-tuition-related expenses such as course materials. The non-refundable lifelong learning credit allows you to claim a total of $2,000 per tax return for tuition only, regardless of how many students qualify. You cannot claim both credits for one student.
The eligibility criteria for these two educational loans are different. For example, the American Opportunity Credit can only be used for four years of post-secondary education, and eligible students must be enrolled for at least half. The lifelong learning credit is more comprehensive and can apply to postgraduate courses or professional classes.
The credits share basic entry requirements. They both share an income limit of $90,000 for singles and $180,000 for married couples filing together.
Rosen writes for the personal finance website geek wallet. This article was distributed by the Associated Press.
Source: LA Times
Andrew Dwight is an author and economy journalist who writes for 24 News Globe. He has a deep understanding of financial markets and a passion for analyzing economic trends and news. With a talent for breaking down complex economic concepts into easily understandable terms, Andrew has become a respected voice in the field of economics journalism.
