If you’ve ever had to write a check to Uncle Sam in April, you’ve likely become a fan of finding ways to cut your tax bill — and that may have you wondering whether you qualify for any tax credits.
Tax credits are the gold nuggets of the tax world. Qualifying for one feels better than finding $100 in your pants pocket. Here’s a brief look at how some of the most common ones work — maybe you’ll find some cash here, too.
A word about the lingo
First, be sure you know the difference between a tax deduction and a tax credit. A tax deduction is a dollar amount the IRS allows you to subtract from your adjusted gross income (AGI), making your taxable income lower. The lower your taxable income, the lower your tax bill.
That’s pretty great, but tax credits are even better. They’re dollar-for-dollar reductions in your actual tax bill. A few credits are even refundable, which means that if you owe $250 in taxes but qualify for a $1,000 credit, you’ll get a check for $750. (Most tax credits, however, aren’t refundable.)
Either way, as the simplified example in the table shows, a $10,000 tax credit makes a much bigger dent in your tax bill than a $10,000 tax deduction does.
Which would you rather have?
|A $10,000 tax deduction…||…or a $10,000 tax credit?|
|* Example rate only. The United States uses a progressive tax system.|
|Less: tax deduction||($10,000)||$0|
|Less: tax credit||($0)||($10,000)|
|Your tax bill||$22,500||$15,000|
What tax credits might I qualify for?
Some of the most popular tax credits fall into one of three big categories. These are just summaries; tax credits have lots of rules, so it’s a good idea to consult a tax professional. Your state may offer a variety of tax credits as well.
Category 1: People with kids
Child tax credit. This could get you up to $1,000 per kid. The higher your income, the less you’ll qualify for. If you are married and filing jointly for 2016, the IRS docks the credit once your modified AGI hits $110,000.
Child and dependent care credit. Generally, it’s 20% to 35% of up to $3,000 of daycare and similar costs for a child under 13, an incapacitated spouse or parent, or another dependent so you can work — and up to $6,000 of expenses for two or more dependents. The percentage is income-based: Families with AGIs of $15,000 or less can get a credit of 35% of their expenses, but that shrinks by one percentage point for every extra $2,000 of income. The rate is 20% for AGIs of more than $43,000. Payments made out of a dependent-care flexible spending account or other tax-advantaged program at work may reduce your credit.
Earned income credit. This credit will get you between $3,400 and $6,318 in tax year 2017 and between $3,468 and $6,444 in 2018 depending on how many kids you have, your marital status and how much you make. If your AGI is less than about $55,000, it’s something to look into, though if you had more than around $3,450 of investment income, dividends, capital gains and a few other things in 2017 ($3,500 in 2018), you won’t qualify. Note: You can get up to $510 in 2017 and $520 in 2018 from the earned income credit even if you don’t have kids, though only if your income is less than $15,010 in 2017 if you’re single ($15,310 in 2018) or $20,600 if you’re filing jointly ($21,000 in 2018).
Adoption credit. For the 2017 tax year, this covers up to $13,570 of adoption costs per child ($13,840 in 2018). The credit begins to phase out at $203,540 of modified adjusted gross income ($207,580 in 2018), and people with AGIs higher than $243,540 don’t qualify ($247,580 in 2018). Also, you can’t take the credit if you’re adopting your spouse’s child. People who adopt special-needs children can get up to the full credit even if their actual expenses were less. In some cases, the adoption need not be final before you claim the credit; in others, it must be.
Category 2: People investing in an education or retirement
The saver’s credit: This runs 10% to 50% of up to $2,000 in contributions to an IRA, 401(k), 403(b) or certain other retirement plans ($4,000 if filing jointly). The percentage depends on your filing status and income, but generally it’s something to look at if your AGI is less than $62,000.
Tax credits are the gold nuggets of the tax world.
American Opportunity credit: This credit runs up to $2,500 per student for tuition, activity fees, books, supplies and equipment during the first four years of college. The student must be enrolled at least half time and can’t have any felony drug convictions. This credit phases out with income, so you may not qualify if your AGI is higher than $90,000 as a single filer or $180,000 as a joint filer. Parents can take the credit if they qualify and claim the student as a dependent on their return.
Lifetime Learning credit: With this credit, you can get up to $2,000 for tuition, activity fees, books, supplies and equipment for undergraduate, graduate or even nondegree courses at accredited institutions. Unlike the American Opportunity credit, there’s no workload requirement. The $2,000 limit is per return, not per student, so the most you can get back is $2,000 regardless of how many students you pay expenses for. This credit also phases out with income, so you may not qualify if your modified AGI is higher than $65,000 as a single filer or $131,000 as a joint filer. If you take this credit, you can’t take the American Opportunity credit, and vice versa.
Category 3: People who made big-ticket ‘Green’ purchases
Residential energy tax credit: This one gets you up to 30% of the cost of solar energy systems, including solar water heaters and solar panels in 2017.
Plug-in electric-drive motor vehicle credit: You could get up to $7,500 for buying a plug-in electric vehicle. The IRS requires that the car have at least four wheels and be propelled “to a significant extent” by a rechargeable battery with a capacity of at least four kilowatt hours. The minimum credit is $2,500 but rises depending on battery capacity. You must buy the car new; used cars don’t count.
A previous version of this article misstated one aspect of eligibility for the adoption credit. This article has been corrected.
Tina Orem is a staff writer at NerdWallet, a personal finance website. Email: firstname.lastname@example.org.
Updated Nov. 25, 2017