It’s crazy to think that anyone would give up a chance to pay fewer taxes or pass up a refund from the Internal Revenue Service. But, crazy as it may be, it happens every year — often because people fail to take advantage of the tax credits they’re eligible for.
With April 18 nearly upon us, make sure you’re up to speed on any credits you may be able to claim, as that could make a serious dent in your tax burden or even result in the IRS writing you a nice check.
(Note: Most 2015 individual income tax returns will actually be due on Monday, April 18 rather than Friday, April 15.) Emancipation Day is an official public holiday in the District of Columbia. It falls on April 16, but when April 16 is a Saturday — which it is in 2016 — then Emancipation Day moves to the previous day, Friday.)
“Tax credits can significantly lower your tax liability,” said Bob Meighan, a CPA and vice president of customer advocacy for TurboTax. “Each dollar of a tax credit reduces your tax by a dollar.”
Credits are more impactful than deductions, which reduce your taxable income — typically, a dollar of a deduction reduces your tax by only about 25 percent.
Generally speaking, this means if you owe $500 in taxes and have a $200 tax credit, you would be on the hook for just $300. It’s important to note, however, that tax credits can be characterized in different ways.
For instance, Meighan said, in some cases you’ll get a refund even if your credits exceed your tax liability; in others, your credit cannot exceed your tax liability. Additionally, credits often phase out or are unavailable if your income exceeds certain thresholds.
Ash Exantus, a financial empowerment coach at BankMobile and author of the book “Mind Right, Money Right: 10 Laws of Financial Freedom,” said it’s important to work with a tax professional who has a good understanding of the different credits.
“Because tax laws change all the time, if you’re not filing your taxes with someone who is familiar with these tax laws … you could potentially be leaving a lot of money on the table,” he said.
“Tax credits can significantly lower your tax liability. Each dollar of a tax credit reduces your tax by a dollar.”
The following are some of the top credits that tax experts say should be on your radar:
1. Earned Income Tax Credit. This credit, which is geared toward people with low to moderate income levels, is a biggie. For those who qualify, the credit can be worth up to $7,500, though the amount varies based on income, how you’re filing and how many dependents you’re claiming. Despite being one of the most potentially lucrative credits, according to the IRS, 1 in 5 people who are eligible don’t claim it.
2. Child and Dependent Care Credit. If you paid to have someone care for a child who is under 13 years old so you can work or go to school, you may be eligible for this credit, worth as much as $2,100, according to Meighan at TurboTax. He said you could also use this credit to claim as much as 35 percent of child care expenses, up to $1,050 for one dependent or $2,100 for two or more dependents.
3. American Opportunity Tax Credit. This credit can be used toward qualified education expenses for students pursuing higher education — provided the program they’re enrolled in leads to a degree or other recognized education credential, BankMobile’s Exantus said. The credit is worth up to $2,500 and can only be used for four tax years per student.
4. Lifetime Learning Credit. Like the American Opportunity Tax Credit, this also applies to education expenses and job training. However, Exantus said, the course or program does not have to result in a degree or certification. With this credit, worth up to $2,000, there is no limit on the number of years you can claim it, though it can’t be claimed in the same year as the American Opportunity Tax Credit.
5. Advanced Premium Tax Credit. This credit is intended to help people below certain income limits pay health insurance premiums when they purchase insurance through the HealthCare.gov exchange. According to the IRS, the value is based on a sliding scale that takes into account income levels and other factors, such as household size and marital status. (When you apply for insurance on the exchange, it will estimate for you what your premium tax credit will be.)
6. Savers Credit. This is a credit for people with low to moderate income levels who are making contributions to an eligible retirement plan, such as a 401(k) or individual retirement account, Exantus said. The credit can be worth up to $2,000, though the actual amount is calculated based on a percentage of the contributions and varies based on income levels.
7. Adoption Credit. “While adopting a child can be expensive, it can be reduced by claiming the adoption credit,” Meighan at TurboTax said, adding that it’s worth up to $13,400 based on adoption expenses — and these can include adoption fees, attorney fees, court costs and travel.
8. Child Tax Credit. Depending on your income level, whether you’re single or married and whether you’re filing jointly, you may qualify to earn up to $1,000 in tax credits per child. However, for you to be eligible to receive this credit, the IRS requires various criteria to be met. For example, the child must be under 17, a relative, claimed as a dependent on your federal tax return and living with you a certain percentage of the time.
9. Credit for the Elderly or the Disabled. This credit can be worth up to $7,500. It applies to those who are 65 years or older or are retired on permanent disability and have taxable income. While this credit can be valuable, Meighan said they “have very low income limits, so they aren’t available to many.”