You have to pay taxes – it’s the law, but that doesn’t mean there aren’t ways to minimize your liability and maximize your refund. Knowing what deductions and credits you’re eligible for can decrease your tax liabilities.
These three credits can help you get more money back at tax time, keeping more of your hard-earned money in your pocket.
1. Child and Dependent Care Credit
The child and dependent care credit is a tax break for families who pay for childcare so the adults can work. This includes working full-time or part-time and whether you work for someone or own a business. If you’re filing a joint return, both parents must have earned income in order to qualify.
Your total credit depends on the number of dependents and your adjusted gross income. The credit is anywhere from 20%-35% of your qualified dependent care expenses. The maximum amount of eligible expenses is $3,000 for one child or $6,000 for two or more children.
It’s important to understand this credit isn’t to cover childcare for date nights, vacation, or any other personal reason. Instead, it’s a subsidy to help cover child care costs so you can work inside or outside the home. If you work at home, it’s vital that you prove you aren’t a stay-at-home mom or dad, though, and that you do run a business.
2. Earned Income Tax Credit
The earned income tax credit is a tax credit for low to moderate-income families. The tax credit ranges from $560 to $6,935. The amount you receive depends on your income, the number of dependents, and your filing status.
The earned income tax credit is refundable. It doesn’t only reduce the amount of taxes you owe. If it decreases your tax liability to less than $0, you’ll receive a refund for any remaining amount.
3. American Opportunity Tax Credit
The American Opportunity Tax Credit helps with undergraduate college expenses. The credit could be worth up to $2,500 and is based on the first $4,000 you spend on college expenses. You can claim the credit for each eligible college student in your home.
The AOTC phases out for single filers who earn more than $80,000 per year and married filing jointly filers earning over $160,000 per year. The phase-out decreases the credit, but it eventually washes out at $90,000 and $180,000, respectively. Like the earned income tax credit, the AOTC is refundable, but only 40% of it is refundable.
Any amount you have left, up to $1,000, can boost your refund. If your tax liability is less than the credit, any amount over 40% ($1,000) is a wash.
Final Thoughts
The IRS offers many ways to boost your tax refund and avoid overpaying your taxes. This is especially important for self-employed borrowers who are responsible for income and self-employment taxes.
Knowing the credits available to you and how to use them is important, especially the refundable credits that can put more money in your pocket. If you need help figuring out which tax credits you’re eligible for, contact Henson & Murtha CPAs today. We’ll help you maximize your tax refund, putting your money to good use.