Before you file your taxes in 2020, it’s essential to make sure you know what tax credits you qualify for.
What is a tax credit?
A tax credit reduces the amount of taxes you owe and sometimes results in a big fat tax refund check from Uncle Sam.
Tax credits differ from tax deductions in that a tax deduction reduces the amount of income you have to pay taxes on. In contrast, a tax credit reduces the actual amount you owe in taxes.
Here are the 5 most common tax credits you’ll want to know about when you file your 2020 tax return.
1. Earned Income Tax Credit (EITC)
The Earned Income Tax Credit is a tax credit for individuals with low to moderate income. It decreases your tax bill and sometimes results in getting a sizable refund.
A professional tax preparer can let you know if you qualify for this credit. But if you’d like to find out if you are eligible right now, you can look at this simple PDF from the IRS. You can download it here.
2. The American Opportunity Tax Credit (AOTC)
Are you, your spouse, or one of your dependents in college? If so, you may be eligible for the American Opportunity Tax Credit.
The AOTC can be accessed by individuals who make less than $80,000 or families who make less than $160,000.
The maximum credit allowance is $2,500 per school year, which you’ll get back on your taxes. The amount you receive depends on your income.
Students must be enrolled in at least half-time schooling to qualify.
The AOTC is only available to taxpayers for the first four years of college. However, if you are in college longer than that, you may qualify for the Lifetime Learning Credit.
3. The Lifetime Learning Credit
The lifetime learning credit provides eligible taxpayers with up to $2,000 in tax credits. Individual filers must earn a maximum of $59,000 or less to qualify. Married taxpayers must make no more than $118,000.
Since the AOTC provides you with a higher credit amount, most people don’t use the Lifetime Learning Credit until they can no longer use the AOTC.
4. Child Tax Credit
This tax credit literally pays you just for having kids.
The child tax credit provides you with a tax credit of up to $2,000 per child. That means your tax bill will decrease by $2,000 multiplied by the number of children you have under 17 years old.
If this tax credit results in a refund rather than just a reduced tax bill, the refund will be $1,400 instead of $2,000.
5. Child And Dependent Care Credit
This tax credit reimburses you for up to 35% of the cost of babysitting or daycare for working parents.
To learn more about each of these tax credits, please contact Midwest Finance today and ask to speak with one of our professional tax preparers.