Tax Credits

Another piece of the tax puzzle is tax credits. This is money subtracted from the tax you owe.

Tax credits are very different from deductions or exemptions. Deductions and exemptions are taken away from your gross income before the tax you owe is calculated.

When a taxpayer qualifies for a tax credit, the credit is subtracted from the total amount of tax owed, dollar for dollar. This means that if a taxpayer owes [latex]$2,000[/latex] in taxes and is eligible for a [latex]$500[/latex] tax credit, their tax liability is reduced to [latex]$1,500[/latex].

Some of the tax credits are refundable. This means that if subtracting them from your tax results in a negative number, you receive a tax refund.

The federal government has placed income limits and restrictions on those eligible to receive tax credits because their value is so high. Here is a partial list of tax credits that you might qualify for:

• Earned income tax credit is a refundable tax credit for low- to moderate-income workers and ranges from [latex]$560[/latex] to [latex]$6,935[/latex] depending on dependents and income. This is refundable.
• American opportunity credit is a credit taken by parents who have children enrolled in college at least half time and pursuing a degree. This credit is worth [latex]$2,500[/latex] per student for the first [latex]4[/latex] years of undergraduate school, subject to income limits. This is a refundable tax credit.
• Lifetime learning credit is a credit is equivalent to [latex]20\%[/latex] of educational expenses, up to [latex]$2,000[/latex] per year, subject to income limits. There is no cap to how many years you can apply for this credit.
• Child tax credit is worth [latex]$2,000[/latex] per child under the age of [latex]17[/latex] if that child lives at home at least half the year, subject to income limits. This is a refundable tax credit.
• Child and dependent care tax credit was designed to help pay for child care while the parent works. The amount of the credit is dependent on your income. However, the maximum amount that can be received is, in 2022, [latex]$4,000[/latex] for one eligible person, or [latex]$8,000[/latex] for two or more qualifying people. A dependent qualifies if they are a child under [latex]13[/latex] years old, a spouse who is unable to care for themselves, or some other qualifying person. This is a refundable tax credit.
• Premium tax credit was created by the Affordable Care Act, and it is one that is received by many people throughout the year. In essence it is a health insurance premium subsidy. The amount of the credit is based on your income and the price of health insurance in your area. This is a refundable tax credit.