Unit 13: Individual Tax Credits PDF

Unit 13: Individual Tax Credits 1. What are Individual Tax Credits? Tax credits reduce your tax liability on a dollar-for-dollar basis. Unlike deductions, which reduce taxable income, credits directly lower the amount of tax you owe. Some tax credits are nonrefundable (limited to the amount of tax...

Unit 13: Individual Tax Credits 1. What are Individual Tax Credits? Tax credits reduce your tax liability on a dollar-for-dollar basis. Unlike deductions, which reduce taxable income, credits directly lower the amount of tax you owe. Some tax credits are nonrefundable (limited to the amount of tax you owe), while others are refundable (you can get a refund even if your credit exceeds your tax liability). 2. Common Types of Individual Tax Credits 1. Child Tax Credit (CTC): ○ Who qualifies: Taxpayers with dependent children under 17. ○ Credit amount: Up to $2,000 per qualifying child. ○ Refundable portion: Up to $1,600 (part of the credit may be refundable as the Additional Child Tax Credit). ○ Income phaseout: The credit starts phasing out when income exceeds $200,000 (single) or $400,000 (married filing jointly). 2. Additional Child Tax Credit (ACTC): ○ The refundable portion of the Child Tax Credit if the credit amount exceeds your tax liability. ○ Refundable up to $1,600 per child for 2024. 3. Earned Income Tax Credit (EITC): ○ Who qualifies: Low- to moderate-income workers. ○ Credit amount: Based on income, filing status, and number of qualifying children. Maximum credit for 2024 is $7,430 (with three or more children). ○ Refundable: Yes. 4. American Opportunity Credit (AOTC): ○ Who qualifies: Taxpayers paying higher education expenses for an eligible student (first 4 years of post-secondary education). ○ Credit amount: Up to $2,500 per eligible student. ○ Refundable: Up to $1,000. ○ Income phaseout: Credit begins to phase out at $80,000 (single) or $160,000 (married filing jointly). 5. Lifetime Learning Credit (LLC): ○ Who qualifies: Taxpayers paying for higher education (no limit on number of years). ○ Credit amount: Up to $2,000 per tax return. ○ Refundable: No, it is nonrefundable. ○ Income phaseout: Phases out at $80,000 (single) or $160,000 (married filing jointly). 6. Saver’s Credit (Retirement Savings Contributions Credit):  ○ Who qualifies: Low- and moderate-income taxpayers who contribute to a retirement plan (IRA, 401(k), etc.). ○ Credit amount: 10%, 20%, or 50% of contributions up to $2,000 ($4,000 for joint filers), depending on income. ○ Refundable: No, it is nonrefundable. ○ Income limits: AGI limits are $36,500 (single), $73,000 (married filing jointly). 7. Premium Tax Credit (PTC): ○ Who qualifies: Individuals and families purchasing health insurance through the Health Insurance Marketplace under the Affordable Care Act (ACA). ○ Credit amount: Based on income, family size, and the cost of health insurance premiums. ○ Refundable: Yes, but if you received more credit than you're entitled to, you may have to repay the excess. 8. Credit for Other Dependents (ODC): ○ Who qualifies: Dependents who are not eligible for the Child Tax Credit (such as older children or other relatives). ○ Credit amount: Up to $500 per qualifying dependent. ○ Refundable: No, it is nonrefundable. 9. Foreign Tax Credit (FTC): ○ Who qualifies: U.S. taxpayers who paid taxes to a foreign government on foreign-sourced income. ○ Credit amount: Equal to the amount of foreign tax paid, but not more than your U.S. tax liability on foreign income. ○ Refundable: No, it is nonrefundable. 10. Adoption Credit: Who qualifies: Taxpayers who incurred qualified adoption expenses. Credit amount: Up to $15,950 in 2024. Refundable: No, it is nonrefundable, but unused amounts can be carried forward for up to 5 years. 11. Residential Energy Efficient Property Credit: Who qualifies: Taxpayers who install renewable energy sources (e.g., solar, wind) in their homes. Credit amount: Up to 30% of the cost of qualifying property installed. Refundable: No, it is nonrefundable. 12. Credit for Excess Social Security and RRTA Withheld: Who qualifies: Taxpayers with more than one employer who had too much Social Security or Railroad Retirement Tax Act (RRTA) taxes withheld. Credit amount: The excess amount of Social Security or RRTA tax withheld. Refundable: Yes. 3. Refundable vs. Nonrefundable Credits  Refundable Credits: These can reduce your tax liability to below zero, and any excess is refunded to you. Examples include the Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC). Nonrefundable Credits: These can reduce your tax liability to zero, but any excess is not refunded. Examples include the Lifetime Learning Credit (LLC) and the Saver's Credit. 4. Example: Comparing Tax Credits Earned Income Tax Credit (EITC): ○ A single filer with two children, earning $20,000 annually, qualifies for the EITC and receives a $5,980 credit. If their tax liability is $2,000, they will receive a $3,980 refund after the credit. Lifetime Learning Credit (LLC): ○ A single filer, paying $5,000 for graduate school tuition, qualifies for a $2,000 LLC. If their tax liability is $1,800, the credit reduces their tax to zero, but they do not receive a refund for the excess $200. 5. Key Forms Form 8862: Required if you were previously denied the Earned Income Credit and want to claim it again. Form 8863: Used to claim the American Opportunity and Lifetime Learning Credits. Form 8962: Used to calculate the Premium Tax Credit. Form 8812: Used to claim the Additional Child Tax Credit. 1. What Are Tax Credits? Tax credits directly reduce the amount of taxes owed on a dollar-for-dollar basis. Unlike deductions, which lower taxable income, credits reduce the actual tax bill. Nonrefundable: Reduces tax to $0 (no refund). Refundable: Reduces tax to $0 + potential refund. Nonrefundable Tax Credits Child and Dependent Care Credit Adoption Credit American Opportunity Tax Credit (Although it has a refundable component) Lifetime Learning Credit Retirement Savings Contributions Credit or, the “Saver’s Credit” The Credit for Other Dependents (ODC) Child Tax Credit (CTC): (the CTC also has a refundable component): Foreign Tax Credit Refundable Tax Credits Additional Child Tax Credit (ACTC) Earned Income Tax Credit (EITC) Premium Tax Credit (related to the Affordable Care Act) American Opportunity Tax Credit (partially refundable) Credit for Excess Social Security and RRTA tax withheld: credit for workers who overpay their tax for Social Tax Credit Refundable/N Eligibility Maximum Key Notes onrefundable Requirements Credit Child and Nonrefundable Working 20%-35% of Used to offset Dependent Care taxpayers with qualifying care costs that Credit dependent expenses (up to enable you to children under $3,000 for one work or seek 13 or disabled dependent, work. dependents $6,000 for two or more) Adoption Credit Nonrefundable Qualified Up to $15,950 Covers adoption adoption fees, court costs, expenses and attorney fees. American Partially First 4 years of Up to $2,500 40% ($1,000) is Opportunity Tax Refundable higher education per student refundable; only Credit available for undergrad students. Lifetime Nonrefundable Qualified tuition Up to $2,000 Available for Learning Credit and education per return undergrad, grad, (LLC) expenses for and continuing postsecondary education. education Retirement Nonrefundable Low- to 10%-50% of Depends on Savings moderate-inco contributions income and Contributions me taxpayers (up to $2,000 contribution to Credit or, the contributing to per individual) qualified “Saver’s Credit” retirement retirement plans plans (e.g., 401(k), IRA). The Credit for Nonrefundable Dependents who Up to $500 per For qualifying Other don’t qualify for dependent dependents such Dependents the Child Tax as older children Credit, including or elderly (ODC) dependents over parents, with no age 17 or elderly age restriction. parents Child Tax Credit Partially Taxpayers with $2,000 per Up to $1,600 (CTC) Refundable qualifying child per child children under refundable age 17 through the Additional Child Tax Credit (ACTC). Foreign Tax Nonrefundable U.S. taxpayers Varies by Prevents Credit with foreign foreign taxes double income taxed paid taxation on by a foreign income earned government abroad Additional Child Refundable For taxpayers Up to $1,600 This is a Tax Credit who qualify for per qualifying refundable (ACTC) the Child Tax child portion of the Credit but can't CTC for those fully claim it who don't owe due to tax enough tax to liability claim the full  credit. Earned Income Refundable Low- to Varies by Depends on Tax Credit moderate-incom income and filing status and (EITC) e individuals dependents number of and families, qualifying based on income children. and number of children Premium Tax Refundable Individuals Varies by The credit Credit (related and families income and helps lower the to the Affordable with moderate insurance cost of Care Act) incomes who premiums premiums for purchased qualifying health health insurance insurance through the plans. Marketplace under the Affordable Care Act American Partially First 4 years of Up to $2,500 40% ($1,000) Opportunity Tax refundable higher per student is refundable; Credit education only available for undergrad students Credit for Excess Refundable If more than Amount of Can claim Social Security the maximum excess credit for and RRTA amount of withholding excess Social Withheld Social Security Security or tax is withheld Railroad from your Retirement wages across Tax Act multiple (RRTA) tax employers