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Get Ready for Taxes: Important things to know about tax credits

With the tax filing season quickly approaching, the Internal Revenue Service recommends taxpayers take time now to determine if they are eligible for important tax credits.

This is the second in a series of reminders to help taxpayers Get Ready for the upcoming tax filing season. The IRS recently updated its Get Ready page with steps to take now for the 2020 filing season.

Earned Income Tax Credit

The Earned Income Tax Credit (EITC) is a refundable federal income tax credit for working people with low to moderate incomes who meet certain eligibility requirements. Because it’s a refundable credit, those who qualify and claim EITC pay less federal tax, pay no tax or may even get a tax refund. EITC can mean a credit of up to $6,557 for working families with three or more qualifying children. Workers without a qualifying child may be eligible for a credit up to $529.

To get the credit, people must have earned income and file a federal tax return — even if they don’t owe any tax or aren’t otherwise required to file.

Taxpayers can use the EITC Assistant to find out if they are eligible for EITC, determine if their child or children meet the tests for a qualifying child and estimate the amount of their credit.

Child Tax Credit

Taxpayers can claim the Child Tax Credit if they have a qualifying child under the age of 17 and meet other qualifications. The maximum amount per qualifying child is $2,000. Up to $1,400 of that amount can be refundable for each qualifying child. So, like the EITC, the Child Tax Credit can give a taxpayer a refund even if they owe no tax.

The qualifying child must have a valid Social Security number issued before the due date of the tax return, including extensions. For tax year 2019, this means April 15, 2020, or if a taxpayer gets a tax-filing extension, Oct. 15, 2020.

The amount of the Child Tax Credit begins to reduce or phase out at $200,000 of modified adjusted gross income, or $400,000 for married couples filing jointly.

Credit for Other Dependents

This credit is available to taxpayers with dependents for whom they cannot claim the Child Tax Credit. These include dependent children who are age 17 or older at the end of 2019 or parents or other qualifying individuals supported by the taxpayer.

Publication 972, Child Tax Credit, available now on IRS.gov, has further details and will soon be updated for tax year 2019.

Education Credits

Two credits can help taxpayers paying higher education costs for themselves, a spouse or dependent. The American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC) are claimed on Form 8863, Education Credits. The AOTC is partly refundable.

To get either credit, the taxpayer or student usually must receive Form 1098-T, Tuition Statement, from the school attended. Some exceptions apply. See the instructions to Form 8863 for details.

Interactive Tax Assistant

The IRS urges taxpayers to use the agency’s Interactive Tax Assistant (ITA) to help determine if they can claim any of these credits. The ITA also provides answers to general questions on filing status, claiming dependents, filing requirements and other topics.

Start with IRS.gov for help that includes tools, filing options and other services and resources. Taxpayers increasingly use IRS.gov as their first resource for tax matters. Information in languages other than English is available under the language tab on IRS.gov.

Filing electronically is easy, safe and the most accurate way to file your tax return. There are a variety of free electronic filing options for most taxpayers including using IRS Free File for taxpayers with income below $66,000, or Fillable Forms for taxpayers who earn more. Taxpayers who generally earn $56,000 or less can have their return prepared at a Volunteer Income Tax Assistance site. Tax Counseling for the Elderly sites offer free tax help for all taxpayers, particularly those who are 60 years of age and older.

Taxpayers can compare eligibility and benefits of two education credits

There are two education credits that can help taxpayers with higher education costs: the American opportunity tax credit and the lifetime learning credit. There are several differences and some similarities between them. Taxpayers can claim both benefits on the same return, but not for the same student or same qualified expenses.

Here’s a comparison of these two credits:

What is the maximum credit or benefit?
American opportunity tax credit: Up to $2,5000 credit per eligible student
Lifetime learning credit: Up to $2,000 credit per tax return

Is it refundable or non-refundable?
American opportunity credit: Refundable for up to 40 percent of credit
Lifetime learning credit: Not refundable

Can taxpayers claim the credit if they file with the filing status married filing separately?
Both credits: No

What is the limit on maximum adjusted gross income for the other filing statuses?
American opportunity credit: Married filing joint: $180,000 Other statuses: $90,000
Lifetime learning credit: Married filing joint: $136,000 Other statuses: $68,000

Can a taxpayer claim credit if they be claimed as a dependent on someone else’s tax return?
Both credits: No

Must the taxpayer or their spouse be a US citizen or resident alien?
Both credits: Yes, unless nonresident alien is treated as resident alien for tax purposes.

What is the number of tax years for which the credit is available?
American opportunity credit: Four tax years per eligible student
Lifetime learning credit: Unlimited

What type of program is required?
American opportunity credit: Student must be pursuing degree or other recognized education credential
Lifetime learning credit: Student doesn’t need to be pursuing degree or other recognized education credential

What is the number of courses for which the credit is available?
American opportunity credit: Must be enrolled at least half time for at least one academic period in 2019
Lifetime learning credit: Available for one or more courses

What qualified expenses does the credit cover?
American opportunity credit: Tuition, required enrollment fees, course materials
Lifetime learning credit: Tuition and fees required for enrollment and attendance

For whom can the taxpayer claim the credit?
Both credits: the taxpayer, their spouse, or a student they claim as a dependent on their tax return

Who must pay the qualified expenses?
Both credits: the taxpayer, their spouse, the student, or a third party

Two education credits help taxpayers with college costs

With school back in session, parents and students should look into tax credits that can help with the cost of higher education. They do this by reducing the amount of tax someone owes on their tax return. If the credit reduces tax to less than zero, the taxpayer may get a refund.

Taxpayers who pay for higher education in 2019 can see these tax savings when they file their tax returns next year. If taxpayers, their spouses or their dependents take post-high school coursework, they may be eligible for a tax benefit.

There are two credits available to help taxpayers offset the costs of higher education. The American opportunity tax credit and the lifetime learning credit may reduce the amount of income tax owed. Taxpayers use Form 8863, Education Credits, to claim the credits.

To be eligible to claim the American opportunity tax credit, or the lifetime learning credit, a taxpayer or a dependent must have received a Form 1098-T from an eligible educational institution.

The American opportunity tax credit is:

Worth a maximum benefit up to $2,500 per eligible student.
Only for the first four years at an eligible college or vocational school.
For students pursuing a degree or other recognized education credential.
Partially refundable. This means if the credit brings the amount of tax owed to zero, 40 percent of any remaining amount of the credit, up to $1,000, is refundable.

The lifetime learning credit is:

Worth a maximum benefit up to $2,000 per tax return, per year, no matter how many students qualify.
Available for all years of postsecondary education and for courses to acquire or improve job skills.
Available for an unlimited number of tax years.

Get Ready for Taxes: Important things to know about tax credits

Taxpayers can compare eligibility and benefits of two education credits

Two education credits help taxpayers with college costs

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