The Complete Guide to Tax Credits

Do you know all you need to know about tax credits?  Which ones are available to you and which ones you should be claiming?  There a lots of tax credits out there and it can get confusing very fast but we are going to break it down for you today.

I previously did  a post on ALL of the tax deductions and credits available to you but that is, naturally, a pretty long post.  So for now we are going to just focus in on credits. 

Here are all the credits you should know about:

Let's explore each of these more in-depth below.

What is a tax credit?

A tax credit is a tax incentive you can claim on your taxes that reduces the amount of money that you owe the IRS.  It is one of the best incentives offered as each credit you can claim reduces your tax bill dollar for dollar.  If you can claim enough, maybe one day your tax bill will be $0.

What is a refundable tax credit?

As if a regular tax credit wasn't good enough, a refundable tax credit is even better!  Not only does a refundable credit reduce your tax bill, it can make it so that the IRS owes you money! 

Say for example you owe the IRS $500 in taxes.  However, you discover that you can claim $1,000 in refundable tax credits.  Now, you no longer owe the IRS $500; they owe you $500.  Ah, music to my ears!

So even if you don't owe taxes and may not need to file, file anyway.  Because you never know, they may owe you money!

So you want to know what these refundable credits are?  I got you!  Check out the list below!

An In-Depth Look at Each of the Tax Credits

Earned Income Tax Credit

One of the most forgotten about credits, this credit is for people with low to moderate income.  It is refundable so even if you do not owe any taxes you can receive money back from the government.  

Check out the income limits and how the credit amount varies with the amount of children you have below.

Child Tax Credit

This credit (CTC) is available to anyone with 3 or more children.  The max credit you can receive has been increased to $2,000 per child.

A qualifying child is a son, daughter, step child/sister/brother, foster child, adopted child, half brother/sister and any of their children, etc. who are under 17.  

They must be a US citizen/national/resident alien, have lived with you for more than half a year, and be claimed as a dependent on your tax return.

There is a new credit for other dependents (ODC) that you may use for dependents who are not your child but whom you claim as a dependent or who do not qualify for the child tax credit.  You can take up to $500 for each eligible dependent.

There are income restrictions however, and those who make over $200,000 ($400,000 if filing jointly) cannot claim this credit.

Additional Child Tax Credit (ACTC)

If you get less than the full amount of the Child tax credit you may use what is called the Additional Child Tax Credit (ACTC) to make up for it.  

The limit for the ACTC has been increased to $1,400 per child and the income threshold has been decreased to $2,500.  So you only need to make more than $2,500 to take this.

You cannot claim the ACTC if you are only claiming the ODC.  You must first qualify and take the CTC.  The ACTC is a refundable credit while the CTC and ODC are not.

Form 8862 (if you have been disallowed) as well as Schedule 8812 may be required.

See Publication 972 for more information.

Child and Dependent Care Credit

If you are paying for the care of your child (under age 13), a disabled spouse, or other disabled dependent that lived with you more than half the year, then you can claim this tax credit.  

Even if you cannot claim your child due to a divorce agreement you can still claim this credit.

You must have earned income to claim this credit however.  And generally, married couples must file jointly to claim this credit unless legally separated.

The amount of the credit you receive will be dependent on your adjusted gross income (AGI) and the work-related expenses you have.  It is also limited to the amount of income either spouse earned that year.  

So if one spouse only makes $1000 that year, you can only take $1000 credit.

The limit for this credit is $3,000 for one qualifying dependent and $6,000 for two or more.

See Publication 503 for more information.

Saver’s Credit

This is a credit reserved for people who contributed to a qualified retirement savings account including your ABLE (Achieving a Better Life Experience) account.  

You cannot take this credit if you are a student and were enrolled full-time at any time during the year, are under 18, and/ or can be claimed as a dependent.

Eligible Retirement Accounts:

Depending on your AGI, the amount of your credit can be up to 50% of your contributions.  However, it is capped at $1,000 ($2,000 if married filing jointly).

American Opportunity Credit

This credit is available to you if you paid expenses for you, your spouse, or your child to attend an educational institution.  You may be eligible to claim up to $2,500 per eligible student for these expenses.  

Furthermore, 40% of this credit is refundable. The credit begins to phase out (for 2019) if you make between $80,000 and $90,000 ($160,000 and $180,000 for filing jointly)

You may use it for undergrad and graduate studies and must be enrolled at least half-time in a degree program.  To claim this credit you should have received Form 1098-T from the educational institution and will need to complete Form 8863 (and possible 8862 as well).  

Some institutions are not required to give you a 1098-T so you may be able to file without one.

You cannot take this credit if you are married and filing separately, if you can be claimed as a dependent, if you make more than $90,000 ($180,000 if filing jointly) or if you have felony drug convictions.  

The credit is also limited to four years including the years you claim the Hope Scholarship Credit.

Hope Scholarship Credit

This credit is available to undergraduate students attending a qualified educational institution and is used to offset qualified expenses.  

It is specifically for students who are otherwise ineligible to receive scholarships and grants.  And it is limited to the first four years of undergraduate education.

You may claim up to $2,500 for this credit.  For Gulf Opportunity Zone students the limit is $3,600.  Rules and restrictions are much like that for the American Opportunity credit. 

I believe it has pretty much been absorbed by the American Opportunity Credit.

Lifelong Learning Credit

Much of the same rules apply as for the American Opportunity credit. This credit however is nonrefundable and there is an annual limit of $2,000 for this credit.  

In calculating the credit it is 20% of the qualified expenses you paid.  So if you only paid $5,000 in qualified expenses, the max credit you can receive is $1,000.  Your income can also limit the amount of the credit.

The main difference between the Lifelong Learning Credit and the American Opportunity credit is that this credit can be used for specialized study to improve or acquire job skills and it is not limited to just 4 years.  It is even available to people with felony drug convictions.

Also, unlike the American Credit, this credit is limited to the expenses you paid directly to the educational institution.

Phase out for 2019: If your income is between $58,000 and $68,000 ($116,000 and $136,000 for filing jointly)

Net Premium Tax Credit

This is a refundable credit designed to help low income families pay for healthcare insurance.  The insurance must have been purchased through the Marketplace.  The credit you receive is based on a sliding scale that relies on your income (AGI).

To be eligible to receive this credit your income must at the federal poverty line or up to 4x the poverty line for your family size.  You can get an advance on this to help offset payments directly.

Residential Energy Credits

If in the past year you installed solar panels for electricity or water heating, small wind energy systems, fuel cell systems, or geothermal heat pumps to your home(s), you may be able to take this credit.  

You may also be able to take this credit for any home improvement that meets energy efficiency requirements.

There are two parts to this credit: The Residential Energy Efficient Property Credit and the Nonbusiness Energy Property Credit.  The last one only applies to existing homes and not homes being constructed.

The Residential Energy Efficient Property Credit

For the Residential Energy part you may be able to deduct up to 30% of the costs, including labor.  For fuel cells, it’s limited to $500 per ½ kilowatt of capacity.  

Also, if costs were shared between you and another person, you will need to split the costs that you can claim appropriately.

In addition to that, for the residential energy portion costs are restricted to $300 for any energy efficiency system, $150 for any qualified boilers, and $50 for advanced air fans. These are the max costs you can use in calculating your credit.

The Nonbusiness Energy Property Credit

For the Nonbusiness Energy part, you may be able to claim 10% of the amount paid for the energy efficiency home improvements.  This can be in addition to the amount you claim for the Residential Energy credit.

The nonbusiness energy credit however has strict credit limits: a combined credit of $200 for windows and a combined total tax credit of $500 ($1000 for filing jointly) for all tax years after 2005.  

You will need to complete Form 5695 to calculate and claim your credit.  You may be able to carry forward any unused portion of the residential energy efficiency credit.  However, any subsidy received for making the installation reduces the cost that you can claim

Alternative Motor Vehicle Credit / Electric Car Credit

This tax credit can only be claimed by the original purchaser of the hybrid vehicle.  And it must be purchased after 2006.  The full deduction amount is only available for a limited time sadly.  Use Form 8910.

If you purchased an electric vehicle, you can use Form 8936 to claim a credit so long as you are using the vehicle in the US and are the original owner.  

Similar to the alternative motor vehicle credit, this credit will began to phase out after 200,000 of such vehicles are sold.  The credit is limited to $7,500.

You cannot claim both credits.

There are also credits for alternative fuel vehicles and electric vehicle passive activity.

Foreign Tax Credit

If you had to pay taxes in a foreign country or US possession and have to pay taxes in the states, you may qualify for this credit.  

You do have the option to take it as an itemized deduction so it's best to check and see which option gives you a better return.  Although, probably, taking the credit will be best.

You cannot take the credit if you decide to exclude your foreign earned income, which you can do with Form 2555 if your income is below $107,600 for 2020 and you live in a foreign country.

To take this credit you must fill out Form 1116.  There are exceptions however and you may not be required to use that form.  Be sure to read the instructions on the form carefully.

Adoption Credit

You may take this credit as well as exclude any employer provided benefits for the expenses you paid in the adoption of an eligible child.  

These expenses can include adoption fees, attorney fees, court costs, travel expenses (including meals and lodgings), and re-adoption expenses for a foreign child.

The maximum credit and exclusion you can take is $14,080 per child.  But you cannot take both for the same expense.  Use Form 8839 to determine how much you can exclude or credit you can take.

This credit begins to phase out if your AGI is more than $211,106.  If you earn more than $251,160 you cannot take the credit (for 2019 tax year).

Credit for the Elderly or the Disabled

This credit is for people who are 65 or older or people who retired due to disability and are receiving disability income.  There are income limits for this credit.  And the amount of credit you can receive ranges from $3,750 to $7,500 depending on your filing status.

General Business Credit

This credit is available to sole proprietorships, partnerships, and corporations who are not publicly traded and whose gross receipts does not exceed $50 million for a 3 tax year period.

See instructions for Form 3800 (pdf) for more information.

Credit for Alternative Minimum Tax Payers

The alternative minimum tax is a tax paid by high economic income earners and applies to individuals as well as estates and trusts.  The tax rate is determined by income.  This credit can be carried forward.  You will need to use Form 8801.

Washington, D.C. First Time Home Buyer's Credit

This is a credit that was available to first time homebuyers in D.C. who purchased a home before 2011.  You could have carried this credit forward until you used it all.

Holders of Tax Credit Bonds

Use form 8912 to claim this credit if you hold bonds such as the Clean Renewable Energy Bond, Qualified Energy Conservation Bond, Build America Bond, Qualified School Construction Bond, Qualified Zone Academy Bond, and New Clean Renewable Energy Bond.

All in All

Tax credits are something you definitely don't want to miss out on.  And with so many out there, there are more chances that they could be applied to your tax bill.  You will want to claim ALL the credits you can WHEN you can.  I know I sure will!