Tax deductions get a lot of attention, mainly because the Internal Revenue Service makes us choose between taking the standard deduction or itemizing.
We make this decision every year, based on which method gives us the better write-off amount. Standard has always won, and since the Tax Cuts and Jobs Act of 2017 became law and nearly doubled the standard, adjusted annually for inflation amounts, the margin of victory has grown.
But there's another way to reduce tax bills or increase refunds. Yes, I'm talking about tax credits.
Why tax credits rule: Internal Revenue Code tax credits have three features that make them better than deductions.
- Tax credits reduce your tax liability dollar-for-dollar.
- Some tax credits are refundable, which means after they wipe out what you owe, you get the excess as a tax refund.
- You can claim any tax credit for which you qualify regardless of whether you itemize or claim the standard deduction.
There are many types of tax credits. In an earlier post, I looked at two popular educational tax credits, the American Opportunity and Lifetime Learning credits.
If you're a homeowner, you might want to check out my post Save some tax green by going greener at home about tax credits for some common home energy efficiency upgrades.
And you can boost your retirement nest egg by taking advantage of the Saver's Credit.
Today, the credit carousel keeps turning with highlights of six tax credits that families might find useful at filing time.
1. Child tax credit: This popular tax break has been around in some form since 1997. The Child Tax Credit (CTC) got added attention, and got even better, during the height of the COVID-19 pandemic. To counter the economic problems created when businesses closed, the CTC amount was increased and made refundable, eligibility expanded, and the credit cash was sent to qualifying families as a monthly check.
The coronavirus might be lingering, but the larger CTC is gone (for now). And it's no longer refundable. But even at its smaller level of $2,000 for each qualifying younger than 17 at the of 2022 child level, the CTC is welcomed by parents. Note, too, that since the CTC was created to help lower- and moderate-income families, it starts phasing out for single filers with adjusted gross incomes of $200,000 or $400,000 for jointly filing married couples.
2. Additional child tax credit: While the CTC isn't refundable, some parents could get a partial refund if they qualify for the Additional Child Tax Credit (ACTC). The potential refund is up to $1,500 of the $2,000 CTC per child.
3. Adoption credit: This is one of the more generous tax credits, worth up to $14,980 for the 2022 tax year. That amount is used to cover your costs if you adopted a child or even just started the adoption process last year. Covered adoption expenses, regardless of whether the process is in the United States or another county, include travel costs, court fees, and, per the IRS guidance, "other expenses that are directly related to and for the principal purpose of the legal adoption of an eligible child."
As with many tax benefits, the adoption credit is reduced for higher-income taxpayers. It begins phasing out when the new parents have modified adjusted gross income (MAGI) of $223,410. The credit is eliminated when MAGI hits $263,410.
4. Child and dependent care credit: When you have a family, you also have the costs of caring for the youngsters. If you're a working parent, the Child and Dependent Care tax credit can help offset some of those expenses. As with the CTC, the child care credit also was expanded to account for special problems created by COVID-19. And like the CTC, the child care credit enhancements have returned to lower pre-pandemic levels.
But even with the reversion, the child care tax credit is still worth checking out. You can claim up to $3,000 of care costs for one child and up to $6,000 for care costs of two or more youngsters. The precise credit amount is 20 percent to 35 percent of those costs, with the percentage based on your income. My post Child care tax credit returns to lower pre-COVID levels, but still worth a look has the math details.
5. Credit for other dependents: The CTC is great if you have younger children. The tax credit for other dependents comes into play when you have a youngster age 17 or older at the end of the tax year, or another person who's dependent on you. This tax credit is worth up to $500 for each qualifying person. My post How to get the $500 tax credit for other dependents has more on this credit claiming process.
6. Earned Income Tax Credit: The Earned Income Tax Credit is one of the best tax breaks for lower- and moderate-income families. For the 2022 tax year, it could be worth up to $6,935. Plus, it's a refundable tax credit.
That six-plus-grand amount is for eligible families with three or more children. The EITC is a maximum of $6,164 if you have two youngsters, and $3,733 for parents of an only child. My post Don't miss out on EITC, but note the 2022 tax return changes has more on the EITC and its income phase outs.
P.S. — If you're a family of one, you also could get a couple of hundred dollars from claiming the EITC.
Claiming the credits: Of course, to get these tax breaks, you'll have to do a bit more work, including dealing with multiple forms, schedules, and worksheets.
The Child, Additional Child, and Other Dependents' tax credits, as well as the EITC, are claimed directly on Form 1040.
However, the credits for Child and Dependent Care costs and Adoption expenses are claimed on Form 1040's Schedule 3 (image except below), which is appropriately named Additional Credits and Payments. Those amounts are then transferred to your 1040.
You'll also have to sort through a few more IRS forms. The CTC, ACTC and credit for other dependents require you fill out Schedule 8812, Credits for Qualifying Children and Other Dependents.
Adoption expenses are detailed on Form 8839, Qualified Adoption Expenses.
Care credit costs are calculated on Form 2441, Child and Dependent Care Expenses.
You also can get additional support computing your credit claims from your tax software, including the versions available at Free File. And, of course, your tax preparer is a big help here if you go that route.
You also might find these items of interest:
- Letting the IRS figure your taxes (and a couple of credits)
- Tax credits are among the 10 reasons to file a tax return even if you don't have to
- 2.9 million children escaped poverty in 2021 thanks to expanded Child Tax Credit