Taxes are a major burden for all working Americans -- especially lower-income households. Thankfully, there are a number of tax credits available to help ease the pain.
Now, as a quick refresher, tax credits work by reducing your tax liability on a dollar-for-dollar basis. They're different from deductions, which only exclude a portion of your income from taxes. If you're looking at a $1,000 tax credit versus a $1,000 deduction, you'll get more value out of the credit because it will allow you to subtract $1,000 directly from your tax bill. Meanwhile, all that $1,000 deduction will do is enable you to avoid taxes on $1,000 of income -- which, if you're in the 25% bracket, will only translate to $250 in savings. With that in mind, here are three tax credits that, when combined, can result in some pretty significant savings.
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1. The Earned Income Tax Credit
Designed to help lower-income households, the Earned Income Tax Credit, or EITC, is one of the most valuable credits out there because it's refundable. The majority of tax credits aren't refundable, which means the most they can do is knock your tax liability down to $0. If you don't owe any tax and qualify for the EITC, you'll actually get a check for the difference.
Eligibility for the EITC is based on how much you earn and the number of qualifying children in your household. You can claim the EITC if your income is at or below the following limits:
DATA SOURCE: IRS.
Assuming you qualify for the credit, here's how much it could be worth to you based on the number of children you have:
DATA SOURCE: IRS.
As you can see, the EITC offers a maximum value of $6,318 which, again, can either be applied to lower your tax liability or come in the form of a refund check. An estimated 20% of eligible tax filers miss out on this credit each year, so if you're looking to save big, make sure you're not one of them.
2. The Child Tax Credit
The Child Tax Credit could put up to $1,000 back in your pocket for every child under the age of 17 you have living in your household. That said, if you earn more than $75,000 as a single tax filer, or $110,000 as a couple filing jointly, the credit is reduced by $50 for every $1,000 over the limit. This means that high-enough earners won't get the credit at all.
Furthermore, unlike the EITC, the Child Tax Credit is non-refundable, so the most it can do is knock your tax liability down to $0. A related credit, however, called the Additional Child Tax Credit, may provide a refund if you qualify.
3. The Child and Dependent Care Credit
If you pay for child care in order to work (or look for work), you may be eligible for the Child and Dependent Care Credit, which can shave up to $2,100 right off your taxes. To qualify, you must have a record of eligible child care expenses, which include payments for day care, a nanny, or summer camp. (Note that paying a caregiver who's your spouse or child doesn't count, so if you work full-time and your husband stays home with your kids, you can't claim the credit.)
You're allowed to claim a percentage of up to $3,000 in child care costs for a single child, or $6,000 for two or more children, when figuring your credit. That percentage, however, is earnings-based. If your income is below $15,000, your credit will be worth 35% of your costs up to $3,000 for one child, or $6,000 for two or more children. That percentage then falls by 1% for every additional $2,000 of earnings until it reaches 20% for those earning $43,000 or more.
All in all, the most the Child and Dependent Care Credit can be worth is $2,100, or 35% of $6,000. While higher earners won't get as much out of the credit, they'll still get something -- which is a nice plus, considering that most credits completely phase out at higher income levels, as we just saw with the Child Tax Credit. One other thing you should know about the Child and Dependent Care Credit is that it's non-refundable, so the most it can do is eliminate any tax liability on your part.
If we add up these three valuable credits for a low-income tax filer with three children who pays $6,000 or more for child care, we'll arrive at a potential $11,418 in savings. And if you have more than three children and qualify for the EITC and Child and Dependent Care Credit in full, that number could climb even higher.
Of course, not everyone qualifies for the EITC, and there are many low-income families with fewer or no children. The point, however, is that if you read up on tax credits and claim the right ones, you stand to save a sizable chunk of money on your taxes this year.
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