Can you smell it in the air? It’s tax season, and we’re all trying to get the biggest refund possible. That means taking advantage of tax deductions and credits to lower our bill. Check out this post for the deductions you can take in 2018, and read on for information on credits.
Tax credits are superior to deductions because they reduce the amount you pay dollar for dollar. So $1,000 in tax credits equals $1,000 less you’re paying in taxes, whereas a $1,000 deduction might lower your tax bill by a few hundred dollars, depending on which tax bracket you’re in. For example, if you’re paying a 25 percent marginal tax rate, you’d save $250 with a $1,000 deduction.
There are two types of credits: Refundable and non-refundable. Refundable is king, because depending on the amount, you could receive a refund (the name really gives it away). Non-refundable credits will lower your bill, but not below $0.
Here are some of the more popular credits:
- Earned Income Tax Credit: Taking the EITC depends on your income (obviously), filing status and how many children you have, and the income limits change every year. It’s meant to help those with modest incomes. For 2018, the limit is $15,270 if you’re single with no kids, $40,320 if you’re single with one kid, $45,802 if you’re single with two kids and $49,194 if you’re single with three-plus kids. If you’re married and filing jointly, the limits are $20,950 with no kids, $46,010 with one kid, $51,492 with two kids and $54,884 with three-plus kids. The credit is valuable: Worth a maximum of $6,431 if you have three or more kids (for a family with no kids the maximum is $519), according to the Motley Fool. The IRS’s website has a lot of useful info to see if you qualify and for how much.
- Child Tax Credit: You can claim up to $2,000 per dependent child under the age of 17 at the end of 2018, depending on your income. Those with MAGI’s of more than $200,000 (single) or $400,000 (married filing jointly) do not qualify.
- Child and Dependent Care Credit: This credit can be claimed regardless of income, unlike many of the others (though it does get smaller as your income increases). For this credit, you need to have paid someone else to care for your child(ren) under 12, your spouse if they cannot take care of themselves, or another person who cannot take care of themselves but whom you claim as a dependent. There are other requirements, as TurboTax explains, and the amount of the credit depends on how much you pay for care. You can claim a percentage up to $3,000 spent on care for one dependent or $6,000 for more. (The higher your income, as noted above, the smaller the percentage you can claim.)
- Saver’s Credit: This is a non-refundable credit meant to encourage lower-income workers to save for retirement. If you contribute to a 401(k) or IRA you’re already getting a tax deduction, but this credit is an additional $2,000 to $4,000 if you qualify. The amount of the credit varies depending on your income and filing status, but as an example, if you’re single and earned less than $19,000, you can receive a credit worth 50 percent of your contributions to your retirement plan. More specifics here. You claim this tax credit with Form 8880 in addition to your 1040.
- The American Opportunity Credit: If you go to a postsecondary institution at least half-time and earn less than $80,000 ($160,000 for married couples), you may qualify for a credit “worth 100 percent of the first $2,000 in qualifying educational expenses and 25% of the next $2,000, for a maximum tax credit amount of $2,500,” according to the Motley Fool. Qualified expenses include things like tuition, books, etc. There are some other qualifications you must meet, which you can read about here.
- The Lifetime Learning Credit: This credit is more flexible than the American Opportunity Credit, but worth less overall. You can take it if you take any sort of postsecondary course. “If you take a single course at a community college ‘just because,’ you could qualify for the Lifetime Learning Credit,” notes the Motley Fool. Income limits for the full credit—which is worth 20 percent of qualifying expenses, up to $10,000—are $55,000 if you’re filing single and $110,000 for married couples filing jointly.
Throughout the next few months we’ll have a variety of tax content to walk you through the new changes for this year. If you have a specific tax-related question, email me at [email protected].
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