The tax owe to the IRS can be reduced using the tax credits available. These tax credits are given as a refund or it can be reduced from the tax payable to IRS. But not all tax payers are eligible for such credits. There are different tax credits that suit every tax payers and it is important to choose the right credits wisely to avail this benefit. Let us see the tax credits one by one below and its eligibility criteria as defined by the IRS.
Earned Income tax credit (EITC)
This type of credit is for individuals working under any organization with low to moderate income. This credit is refundable and so you may get refundable money back as a check if your credits are more than the tax you owe to the IRS. The eligibility criterion depends on qualifying children, annual income, investment income etc. The tax amount varies based on this criterion with the minimum amount being $529 to maximum of $6,431. To eligible for EITC, one needs to keep an investment income less than or equal to $3,500. IRS has provided much simpler booklet which helps us to find the eligibility for EITC by answering few questions.
Tax Credit for individuals with kids and dependent
This type of credit is refundable and it is for the individuals with at least one or more children under the age of 17. Dependents are any person (not your spouse) as your relative who wasn’t physically or mentally able to care for him or herself. They also must meet the eligibility of annual income earned as less than $4,150 to become a dependent. The percentage of credit depends on the annual income earned by the individual who is filing for the tax i.e. more income less credit. One can get as high as $2,000 per child as credit. Each kid or the dependent should have a valid social security number issued before the tax filing due date i.e. for 2019 tax year, before Apr 15 2020 or Oct 15 2020 (if approved for tax-filing extension). To qualify for child care credit, one must file Form 1040 or Form 1040NR, not Form 1040NR-EZ and pass all the tests which are mention in the IRS website.
Child adoption tax credits
Adoption tax credits are non-refundable, and therefore it is deducted from the tax liable based on the expenses filed but up to a maximum of $14,080. Therefore, IRS will not be sending any check if your tax liability is less than the expenses mentioned for adoption credits. But, if you are adopting a special–needs child, the full credit amount will be refunded irrespective of the expenses filed for taxes. To find out if you are eligible to file for adoption credits, take the test from IRS in this link.
The education credits have two types – American Opportunity Credit and Lifetime Learning Credit.
- American Opportunity Credit – This is partially refundable credit, and applicable for each eligible student for the first four years of higher education. One can get a maximum annual credit of $2,500 per eligible student. If the partial credit amount equals the tax you owe to zero, then 40% of the remaining credit (maximum $1,000) will be refunded through checks. The students must have modified adjusted gross income less than $90,000 as single filer or $180,000 as joint filer and not have any felony drug conviction at the end of the tax year. Students must get the Form 1090-T and Tuition Statement from their educational institution for claiming through Form 8863.
- Lifetime Learning Credit – This credit is based on the number of tax returns and not on the number of students. One can claim up to $2,000 per tax return for any eligible students who are enrolled in undergraduate, graduate and professional degree courses that are taken to acquire or improve job skills. The four years criterion (American Opportunity Credit) is forfeited as the claim is based on every tax return. One must have income less than $67,000 as a single filer or $134,000 as a joint filer. The other eligibility criteria are listed out in the IRS website
One cannot claim American Opportunity Credit if you are applying for Lifetime Learning Credit or vice versa. Also it is important to make sure you are eligible for these credits, if IRS audit your returns and found not eligible, you may be banned from getting such credits for two to ten years.
This credit is known as saver’s credit, and offers a maximum of $2,000 for making eligible contributions to your IRA (Individual Retirement Arrangements) or employer-sponsored retirement plan. These credits are based on the income from 10 to 50% of the contribution to your retirement plan. One must have an adjusted gross income less than $48,000 if he/she is the head of the household, and less than $32,000 for other filers. More information is available in the IRS website for 2019 saver’s credit eligibility and how to apply.
The IRS recommends every taxpayer to use its Interactive Tax Assistant (ITA) tools in order to find if they qualify for any of the credits. This tool also provides answers to general tax law questions and help in determine the income is taxable, documents required etc. Without proper documentations and eligibility, IRS can suspects the tax filed and conduct tax audits to verify the facts provided in the returns are correct. Therefore it is important to understand your eligibility and gather all the documents for filing.
As the tax season for 2019 is nearing, it is important for the taxpayers to make use of every credit that you qualify to fully benefit from the IRS offers.
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