Taxpayers with low to moderate incomes who want to minimize their taxes or increase their tax refund might benefit greatly from federal tax credits. Here are the five largest tax credits that may generate huge savings.
Tax credits are monetary amounts that taxpayers may immediately deduct from the taxes they owe. This is not the same as tax deductions, which lower a person’s taxable income.
The value of a tax credit will depend on its type. Some tax credits may be available to people or corporations in specific regions, communities, or sectors.
The Earned Income Tax Credit is one of the most significant credits available to taxpayers. The 1975-established Earned Income Tax Credit (EITC) is based on income and is phased in according to filing status: single, married filing jointly, or any of those with children. It was created to help offset the cost of Social Security taxes and to encourage people to work. Adjusted gross income, earned income, and investment income are taken into account when determining eligibility and credit amounts.
The minimum age requirements for 2022 are 19 years old, however they are 18 for eligible homeless youngsters and former foster youth, and 24 for some pupils. There is no higher age limit for the 2022 tax year.
Both spouses must be U.S. citizens or legal permanent residents with active Social Security numbers if they are married.
If you can be claimed as a dependent on another filer’s tax return, you are ineligible.
You are not eligible for the EITC if:
You received investment income in 2022 totaling at least $10,300. You cannot be eligible for the credit if you have “disqualified income” according to the IRS.
If you work for yourself, you can be eligible for the EITC. Even if you believe you won’t qualify, tax professionals advise that you check your status each year.
The Hope Credit helped families pay for the price of higher education. From 2009, that credit has been replaced and augmented by the American Opportunity Tax Credit.
Four years of post-secondary study are covered by the AOTC.
Those with modified adjusted gross incomes (MAGI) of $80,000 or less, or $160,000 or less for married couples filing jointly, are eligible for the full credit.
You may get up to $2,500 of the cost of eligible tuition and course materials paid during the taxable year, depending on your income (the credit decreases as income grows).
The student must have been enrolled for at least one academic period at least half-time.
Per-student availability applies to this credit.
The American Opportunity Tax Credit only applies to the first four years of post-secondary education; in contrast, the Lifetime Learning Credit was designed to assist with the cost of all post-secondary education. Those who are not pursuing a degree are also eligible for the credit.
For each eligible student, the Lifetime Learning Credit might reach $2,000 in total.
Both married couples filing jointly and individual taxpayers who meet the requirements and make $80,000 or less in 2022 are eligible for the full credit.
When income exceeds these limits, the credit is reduced.
In contrast to 2021, when you would have gotten $3,000 each dependent kid between the ages of six and 17 and $3,600 every dependent child under the age of five, you will now only receive $2,000 per child. The minimum age requirement to qualify for the CTC is also lowered to 16 years old for the 2022 tax year.
The amount of credit you can claim on your 2022 income tax return, however, may be higher than it was during the 2021 tax season if you still have children under the age of 17. This is because the Advanced Child Tax Credit was not distributed in 2022.
The Savers Tax Credit, formerly the Retirement Savings Contributions Credit, is available for contributions to certain other retirement plans and qualified investment retirement accounts (QIRAs), 401(k)s, and other programs. The highest tax credit is offered to taxpayers with the lowest earnings, up to $1,000 for single filers and $2,000 for joint filers.
The Savers Tax Credit’s maximum income limits for single filers, heads of household, and married couples filing jointly are $34,000, $51,000, and $68,000, respectively, for 2022.
The person filing the tax return must be at least 18 years old and cannot have been a dependent on another person’s return or be enrolled full-time in school.