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Top Tax Credits Every American Should Know

Top Tax credits
With all of these tax credits to choose from, hopefully there is one that can benefit you. Make sure to discuss any of these credits with your tax advisor if you think you qualify.

Tax credits are more valuable than deductions. Learning some of the top tax credits can help you on your upcoming tax return. 

Remember, deductions are only a deduction against your income, while a ‘tax credit’ is a credit against the tax you owe…and some are even refundable if you have more credit than tax.

Example. Let’s say you have a $1,000 deduction versus a $1,000 credit, and you’re in a 20% tax bracket. If you have $50,000 of income, the $1,000 deduction reduces your income to $49,000 and you just saved $200 in tax. However, in turn, a $1,000 tax credit is just that…tax savings of $1,000! It’s a lot better than $200.

Top Ten (10) Tax Credits

Here are the Top 10 tax credits a taxpayer (you) can take on their 1040 Tax Return. See if you may qualify for one of these tax credits below in the future.

1.Earned Income Tax Credit

One of the most substantial credits for taxpayers is the Earned Income Tax Credit (EITC). The amount of this top tax credit and the taxpayer’s eligibility for it are based on adjusted gross income, earned income, and investment income. This credit is typically for those with lower to middle income.

Information and Qualifications about this Credit:

  • In 2022, those with income between $16,480 and $59,187 generally qualify for a credit of $560 to $6,935.
  • The taxpayer must be at least 19 years old, and a specified student must be at least 24. There is no upper age limit for the 2022 tax year.
  • If married, both spouses must have valid Social Security numbers and must have lived in the country for more than six months.
  • If someone claims the taxpayer as a dependent on another filer’s tax return, they do not qualify.
  • The taxpayer won’t qualify for the EITC if they earned $10,300 or more in 2022 from investment income. That is considered “disqualified income” and they cannot qualify for the credit.
  • This credit is also refundable.

If the taxpayer is self-employed, they may qualify for the EITC. Since this credit is refundable, Tax Experts recommend that the taxpayer checks their eligibility every year, even if they think they won’t qualify. 

2. Child and Dependent Care Tax Credit

The Child and Dependent Care Tax Credit (CDCTC) helps defray the costs of babysitting or daycare. It’s available to people who pay for childcare for dependents under age 13 in order to work OR even look for work. The credit is also available for the cost of caring for a spouse or a dependent of any age who is physically or mentally incapable of self-care.

Qualifications for this Credit:

  • The CDCTC was much more generous in the year 2021 due to the American Rescue Plan legislation. However in 2022 it’s back to 2020 rules and limits.
  • To qualify, the taxpayer’s filing status must be; single, married filing jointly, head of household or qualifying widow or widower with a qualifying child.
  • The credit ranges from 20-35% percent depending on income. It can be applied to as much as $3,000 of qualifying expenses if the taxpayer pays for the care of one qualifying child, or up to $6,000 if they pay for the care of two or more.
  • The beginning of the reduction of the credit is increased from $15,000 to $125,000 of adjusted gross income (AGI).
  • This credit is nonrefundable in 2022.

It is important to keep this tax credit in mind. Even though it is not refundable, it can help reduce the tax that might be due on the taxpayer’s tax return. 

3. Child Tax Credit

The child tax credit, or CTC, is an annual tax credit available to taxpayers with qualifying dependent children. Again, the American Rescue Plan significantly increased the CTC and also provided advance payments. That completely changed in 2022.

Changes and Qualifications on this Credit:

  • In 2022, qualifying families will no longer get advanced credit payments. This means that those taxpayers will get the credit when they file that return in 2023.
  • The child tax credit has now reverted in 2022 back to its original limit of $2,000 for every dependent under age 16. Income thresholds for single taxpayers and heads of household are set at $200,000 to qualify (and $400,000 for joint filers).
  • First phaseout: Income exceeds the above thresholds but is below $400,000 (married filing jointly) or $200,000 (all other filing statuses). The taxpayer’s total credit per child can be reduced by $50 for each $1,000 (or a fraction thereof). This phaseout will not reduce their credit below $2,000 per child.
  • Second phaseout: Income exceeds $400,000 (married filing jointly) or $200,000 (other filing statuses). The phaseout will continue docking $50 per each $1,000 and begin to reduce the taxpayer’s credit per child below $2,000. The taxpayer may be disqualified from the credit altogether.
  • The taxpayer must have provided at least half of the child’s support during the last year, and the child must have lived with the taxpayer for at least half the year.
  • The child cannot file a joint tax return.
  • The credit is refundable up to $1500.

Even though this credit has unfortunately decreased, the taxpayer is still going to SAVE ON TAXES. 

4. American Opportunity Tax Credit

The American Opportunity Tax Credit (AOTC) covers four years of post-secondary education. 

Information about this Credit:

  • Depending on the taxpayer’s income (the credit drops as income increases), they may receive up to $2,500 of the cost of qualified tuition and course materials paid during the taxable year.
  • The full credit is available to people whose modified adjusted gross income (MAGI) is $80,000 or less, or $160,000 or less for married couples filing jointly.
  • The student must be enrolled at least half-time for at least one academic period.
  • This credit is available on a per-student basis.
  • This credit is also refundable.

When taking this credit the taxpayer needs to have some form or statement. This would include a Form 1098-T tuition statement, that way you can figure out your credit. Always remember to make sure that you (the taxpayer) are qualified before claiming the credit.

5. Lifetime Learning Credit

The Lifetime Learning Credit is different than the AOTC in that it is available for any years of post-secondary education, not just the first four. Also, the credit is available for people not pursuing a degree. It could include coures to improve or acquire job skills. 

Information and Qualifications on this Credit:

  • The Lifetime Learning Credit may be as high as $2,000 per eligible student.
  • For 2021, the full credit is available to eligible individual taxpayers who make $80,000 or less, or married couples filing jointly who make $160,000 or less.
  • The credit phases out as income goes beyond these amounts.
  • The credit is nonrefundable

Determining whether or not a taxpayer is eligible can be difficult. If you are in need of assistance please reach out to someone at our office KKOS Lawyers. They can help assist and guide you on what to do or who to talk to. The IRS also has resources to help taxpayer’s decide if they are eligible for an educational tax credit:” Am I Eligible to Claim an Education Credit?

6. Savers Tax Credit

The Savers Tax Credit is for eligible contributions to retirement plans, such as qualified investment retirement accounts, 401(k)s and certain other retirement plans. Taxpayers with the least income qualify for the greatest credit.

Information about this Credit:

  • Eligible taxpayers must be at least 18 or older, not claimed as a dependent on another person’s return, and not a student.
  • Depending on a taxpayer’s adjusted gross income reported on their Form 1040 series return, the amount of the credit is 50%, 20% or 10% of contributions to a qualified retirement plan.
  • The maximum contribution amount that may qualify for the credit is $2,000 ($4,000 if married filing jointly), making the maximum credit $1,000 ($2,000 if married filing jointly).
  • For 2022 the maximum income for the Savers Tax Credit is $36,750 for single filers, $54,750for heads of household, and $73,000 for those married and filing jointly.
  • The credit is nonrefundable.

Also, it is critical to know that just because the taxpayer is eligible for this doesn’t mean they qualify. The taxpayer needs to make a retirement plan or IRA account contribution. They also need to be under the maximum adjusted gross income limit. This tax credit is going to do exactly what it states, “save”. It is going to save the taxpayer money and reduce their tax bill dollor-for-dollar. 

7. Non-Business Energy Tax Credit

The existing Non-Business Energy Property Credit was revived for 2022, and restructured as the Energy Efficiency Home Improvement Credit beginning in 2023.

Qualifications for this Credit:

  • Homeowners may be able to claim the Nonbusiness Energy Property Credit for energy efficiency improvements and energy property expenditures they make during 2022.
  • A homeowner’s total lifetime credit is limited to $500. The annual credit for particular types of property is also limited.
  • In 2023, this credit is replaced with the new and improved Energy Efficiency Home Improvement Credit. The new credit is generally equal to 30% of: a homeowner’s qualified energy efficiency improvement costs, residential energy property expenditures for qualified energy property, even if the taxpayer does not own the home, and a homeowner’s home energy audit costs. The credit no longer has a lifetime limit, and increases the maximum tax credit from $600 to $1,200 per taxpayer. 

For taxpayers/homeowners that have implemented this into their life or want to, this is a credit you NEED to keep in mind. 

8. Residential Clean Energy Credit

The 2022 credit applies to expenditures for solar, fuel cell, wind energy and geothermal heat pumps. After 2022, the credit rate increases, and the credit extends to battery storage technology.

Information and Qualifications about this Credit:

  • Costs incurred from the beginning of 2022 to the end of 2032 would qualify for a 30% tax credit. The credit would fall to 26% in 2033 and 22% in 2034.
  • The maximum tax credit for fuel cells is $500 for each half-kilowatt of power capacity, or $1,000 for each kilowatt.
  • The credit is nonrefundable.

This credit is an example of something that is unordinary… but make sure to try and take all the tax credits you qualify for.  

9. Clean Vehicle Tax Credit

The Inflation Reduction Act created a tax credit for consumers who buy new electric vehicles.

Details about this Credit:

  • Taxpayers can get up to $7,500 for buying a plug-in electric vehicle.
  • The credit is $2,500 or 10% of cost depending on number of wheels and battery capacity. Taxpayers must buy new; used vehicles don’t count.
  • The maximum credit is available for vehicles with battery components and critical minerals sourced domestically or from countries where the United States has a free trade agreement.
  • Families making more than $300,000, or individuals making more than $150,000 are NOT eligible for the credit.
  • Individuals don’t qualify for the tax break if their van, sport utility vehicle or pickup truck costs more than $80,000. There’s a $55,000 sticker-price limit for other vehicles.
  • The bill also creates a tax credit for used versions of clean vehicles. Buyers could get $4,000 or 30% of the sale price, whichever is less. Consumers qualify if their modified adjusted gross income is less than $150,000 for married couples or $75,000 for single filers. The sale price can’t exceed $25,000, and buyers only get the credit if it’s the first sale of the used vehicle. Moreover, they can also only get the credit once every three years.
  • The credit is nonrefundable

This is a great tax credit for taxpayers who use electric vehicles and own one themselves. 

10. Adoption Tax Credit

For adoptions finalized in 2022, there is a federal adoption tax credit of up to $14,890 per child.

Information for this Credit:

  • Parents must have adopted a child other than a stepchild and the child must be either under 18 or be physically or mentally unable to take care of him or herself.
  • The tax credit starts to phase out for families with a modified adjusted gross income between $214,520 and $263,410.
  • The tax credit is nonrefundable

With all of these tax credits to choose from, hopefully there is one that can benefit you. Make sure to discuss any of these credits with your tax advisor if you think you may qualify. Many important deadlines and tax information are outlined in my yearly calendar. Make sure to grab one so you are ready for this upcoming year. Just click on this link here: MJK Calendar.

* To sign up for Mark’s weekly Free Newsletter and receive his Free E-Book “The Ultimate Tax Strategy Guide – 30 Steps to Saving the Most Money on Your Taxes” visit www.markjkohler.com.

Mark J. Kohler is a CPA, Attorney, co-host of the PodCasts “The Main Street Business Podcast” and “The Directed IRA Podcast”, and the author of “The Business Owner’s Guide to Financial Freedom- What Wall Street Isn’t Telling You” and, “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions”, as well as several other well-known books. He is also the CFO of Directed IRA Trust Company, and a senior partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP, and the accounting firm K&E CPAs, LLP. 

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