Tax credits lower your overall tax liability, which means you may owe less or receive a larger refund. These are used by governments to help taxpayers cover expenses or as incentives for certain actions, such as driving an electric vehicle.
Tax credits are often thought to be more advantageous than tax deductions because they provide a dollar-for-dollar reduction. Tax reform in 2023 is projected to result in lesser tax refunds this year. According to IRS data, the average return this year is $3,079, which is 11% less than the previous year’s average of $3,473.
How Can Tax Credit Affect Taxes?
Claiming all of your eligible credits is a great strategy to defy the trend of smaller tax refunds. Even if the child tax credit is lower this year, it is still a sizable $2,000 for each child under the age of 17 in 2022.
Tax credits will reduce your overall tax liability. It is critical to understand the unique eligibility requirements of each credit. Your income may affect whether you qualify for the credit or the amount of credit you can receive (partial credit).
The child tax credit is available to all parents who fulfill certain income requirements, and families can also get money back for child care, adult dependents, or adoption expenditures.
Child Tax Credit
This benefit for families with young children offers $2,000 for each dependent child under the age of 17 who had a Social Security number at the end of 2022. The $2,000 per kid sum begins to taper out at $200,000 in income for solo filers and $400,000 in income for married couples filing jointly.
Credit For Additional Dependents
You can earn a $500 credit for each of your children or other dependents who were 17 or older at the end of 2022. This information should also be included on lines 6 to 8 of Schedule 8812.
Although the IRS places this “credit” on a separate page of Form 8812, it functions similarly to a partial refund for any child tax credit funds that exceed your tax burden.
Adoption Credit
If you adopted a child or began the adoption process in 2022, you may be entitled to up to $14,980 in reimbursement for qualified expenses such as travel and court fees. For taxpayers with modified adjusted gross income (MAGI) of $223,410, the credit begins to trend off and is totally removed at $263,410.
Child And Dependent Care Credit
This tax credit reimburses expenses incurred in caring for eligible dependents under the age of 13 or dependents who are physically or mentally impaired.
Earned Income Tax Credit
While the EITC is not limited to families, taxpayers with children benefit the most. The EITC is intended for low- to moderate-income earners and runs from $560 to a maximum of $6,935.
Read more: Social Security: Why you might expect a 20% payment cut?
Tax Credits For Education Expenses In 2023
The present US tax code contains two credits for higher education costs. While the Lifetime Learning Credit and the American Opportunity Tax Credit are similar, it is critical to understand the distinctions.
Lifetime Learning Credit
The LLC, which was introduced with the Taxpayer Relief Act of 1997, provides a 20% refund on the first $10,000 spent on higher education expenses at qualified institutions. As long as you paid the expenses, the student can be you, your spouse, or an eligible dependent.
American Opportunity Tax Credit
The AOTC was designed to replace the Hope Scholarship credit, which assisted families in paying for the first two years of college. It doubled both the benefit amount and the number of years that families could claim the incentive.
Read more: Is it possible to receive Child Tax Credit even if you haven’t submitted a tax return?