Use these guidelines to help you maximize your Income Tax return for 2024

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1. Child Tax Credit - Was $1000 for each qualifying dependent under 17. The child tax credit has been expanded to $2,000 per qualifying child and is a refundable credit up to $1,400, subject to phaseouts. The remaining $600 will be applied towards any tax liability or taxes owed. The bill also includes a temporary $500 (Family Credit) nonrefundable credit for other qualifying dependents. 

Under tax reform, the Child Tax Credit may be worth as much as $2,000 per qualifying child depending upon your income - that's twice as much as before. A qualifying child for this credit must meet all of the following criteria:

The child must be under age 17 – age 16 or younger – at the end of the tax year.

The child must either be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister or a descendant of any of these individuals, which includes your grandchild, niece or nephew. An adopted child is always considered your own child.

The child must not have provided more than half of their own support.

You must claim the child as a dependent on your federal tax return.

The child must be a U.S. citizen, U.S. national, or U.S. resident alien and you must provide a valid Social Security number (SSN) for the child by the tax return due date.

The child must have lived with you for more than half of the tax year (some exceptions apply).

In prior years, the Child Tax Credit was nonrefundable which means that if the available tax credit exceeded your tax liability, your tax bill was simply reduced to zero. So even if you were able to claim the entire $1,000 per child (the maximum available credit for the 2016 tax year), if you didn't have any tax liability, you couldn't benefit from the credit. The credit would not carry forward to any future years, or back to any past years: it simply disappeared.

Under tax reform, part of the Child Tax Credit remains nonrefundable but the "old" Additional Child Tax Credit, which was refundable, has essentially been merged into the new credit. I know that sounds confusing but what it means is that the Child Tax Credit is just one credit worth up to $2,000 per child and includes a refundable piece of up to $1,400 per child. To be clear, the $1,400 refundable piece is included as part of the $2,000 Child Tax Credit and is not an additional credit (unlike before).

A refundable credit means that you can take advantage of the credit even if you do not owe any tax. Unlike with a nonrefundable credit, if you don't have any tax liability, the "extra" credit is not lost but is instead refunded to you. To claim the refundable portion, you must have earned income (generally, wages, salary, tips, and net earnings from self-employment). For purposes of the new Child Tax Credit, the refundable portion is equal to 15% of your earned income which exceeds $2,500 up to the maximum credit.

Let's do the math. Say your earned income is $10,000 and let's assume that you are entitled to the entire $2,000 credit. However, at that income level, you likely don't owe any tax. With a nonrefundable credit, that wouldn't mean anything to you. However, with the refundable piece of the credit, you can pocket up to $1,125 since $10,000 (your earned income) less $2,500 x 15% = $1,125.

What if, instead, your earned income was $50,000 and your tax owed was $5,000? You would be entitled to the entire $2,000 nonrefundable credit - no need to do the math on the refundable piece. A nonrefundable credit reduces what you owe, it just can't reduce your liability below zero. So after you apply the $2,000 credit, your tax liability is reduced to $3,000. Easy, right?

But what if you had already paid $5,000 as withholding? Do you lose the credit or the withholding? NO. Don't read too much into the word "nonrefundable" - it only means you can't reduce your tax burden below zero but it doesn't negate an overpayment. Think of nonrefundable credits as tax reductions and refundable credits as payments - that's more or less how they appear on your form 1040.

If you have three or more qualifying children, you can use an alternative formula to determine the refundable portion. Under the alternative formula, the refundable portion is equal to the amount by which your Social Security taxes (those taken out of your wages or paid out as self-employment taxes) exceed your earned income credit (sometimes called EIC or EITC).

2. Family Credit -   Under tax reform, the child credit also includes a $500 non-refundable credit for qualifying dependents other than qualifying children. This has been referred to as a "family credit" and allows you to claim a credit for other dependents in your household that don't meet the definition of qualifying child. For many of you this credit will increase your refund for non qualifying dependents you claim. The credit is clearly intended to make up for the fact that you no longer have the ability to claim other dependents like your parents on your tax return as personal exemptions since those have been eliminated. For purposes of the additional non-refundable "family" credit, the definition of dependent still generally applies but there is no requirement to provide an SSN (you'll still need a taxpayer ID number).

Non qualifying dependents you can claim for the family credit must be above the age of 17 by the end of the year. They must have also lived with you at least 6 months out of the year and must meet the dependent relationship requirements. The relationship requirements are as follows: Grandfather, Grandmother, Father, Mother, Aunt, Uncle or have some family relation. 

3. Earned Income Tax Credit (EITC).   The Earned Income Credit is one of the biggest tax credits around, especially since it's a refundable credit (meaning it can create a tax refund for you). However, the rules for qualifying and claiming this credit are rather tricky, to say the least. Fear not, because below you'll find a step-by-step description of how to claim this valuable credit.

Step 1: Check your qualifications

In order to qualify for the Earned Income Credit, you have to meet certain basic requirements. First, you, your spouse, and any qualifying children all have to have Social Security numbers. Second, you can't use the married filing separate filing status. Third, your investment income for the year must be $3,450 or less. And fourth, you have to have at least $1 in earned income for the year. "Earned income" includes wages, salaries, tips, and other pay earned from employment; self-employment income; and long-term disability benefits.

Step 2: Add up your income

While you have to have at least some earned income to qualify, you can't exceed the income limits set by the credit. There are different income limits based on your filing status and on the number of qualifying children you have. To count as a qualifying child, the child in question has to be related to you (son, daughter, adopted child, stepchild, foster child, grandchild, sibling, or descendant of a sibling). They also have to be younger than 19 (or younger than 24 if a full-time student) and live with you more than half the year.

If you make more than the income limit that applies to you for the year, either in earned income or in adjusted gross income (AGI), you can't claim the Earned Income Credit. Your income for the year also affects how large your credit will be, as you'll see in the following section.

Step 3: Calculate your credit

If you meet the basic requirements to claim the credit, you then have to figure out just how much of a credit you can claim. The maximum amount for the Earned Income Credit is based on how many qualifying children you have.

However, the actual amount you can claim for this credit is based on your income for the year and your filing status. If you want to simplify your tax return and your life, you can have your tax preparer (Angular Financial) calculate your Earned Income Credit for you. 

Step 4: Have Angular Financial complete your tax return (and get ready to wait)

Once we've calculated your Earned Income Credit, we can complete the rest of your tax return and send it in as usual. However, claiming the Earned Income Credit means that your refund for the year may be delayed. By law, the IRS must hold any refunds for tax returns including the Earned Income Credit or the Additional Child Tax Credit until mid-February, so that they can subject these returns to additional review.

Yes, it's a hassle to claim this credit and then have to wait for your refund on top of it. But given how much money you stand to make from it, the Earned Income Credit is well worth all the trouble.

FYI: For 2019, the maximum EITC amount available is $6,557 for married taxpayers filing jointly who have three or more qualifying children. Phaseouts apply. You can check out Revenue Procedure 2018-57 (downloads as a pdf) for a table providing maximum credit amounts for other categories, income thresholds, and phaseouts.

4. Child and Dependent Care Credit - The Child and Dependent Care Credit is a nonrefundable tax credit designed to make it easier for working parents to afford child care.

In order to take the credit, the following qualifications must be met:

You must have earned income during the tax year. For joint returns, both spouses must have earned income. There's an exception if you (or your spouse) are disabled, or were a full-time student. 

You can't use the Married Filing Separately status.

You paid for child care for a child under age 13, or for a disabled dependent of any age. The child care provider cannot be someone who can claim as a dependent -- for example, you can't pay your 17-year-old child to care for your five-year-old child and take the credit for those expenses.

You paid the child care expenses so you (and your spouse) could work, look for a job, or go to school. Again, if you were disabled, this requirement doesn't apply.

If you qualify, the Child and Dependent Care Credit is worth 20% to 35% of your qualifying expenses, depending on your adjusted gross income. If your income is $15,000 or less, you qualify for 35%. The percentage drops by one for every $2,000 in income above $15,000. So, for an AGI between $19,000 and $21,000, your Child and Dependent Care Credit would be 33% of qualifying expenses. This maxes out at a 20% rate for AGI greater than $43,000. There is no upper income limit for the Child and Dependent Care Credit.

Your applicable percentage is applied to as much as $3,000 in qualifying expenses for one child, or to $6,000 in expenses for two or more children.

As an example, if your AGI is $50,000 for the year and you paid $4,000 in child care expenses for one child, you would be able to claim a credit for 20% of $3,000 of those expenses, or a $600 credit.

5. The American Opportunity Tax Credit (AOTC) - There are two tax credits available for Americans who pay college tuition, and the first one is the American Opportunity Tax Credit, or AOTC. This is the more potentially lucrative of the two, but it's also the more difficult to qualify for.

First, the qualifications. In order to qualify for the American opportunity credit, here are the criteria:

The student must be pursuing a degree, certificate, or some other type of credential.

The student needs to be enrolled at least half-time for one or more academic periods during the tax year. While the definition of half-time varies by school, a common definition is at least six credit hours in a semester.

The student cannot have completed four years of post-secondary education at the beginning of the tax year. The AOTC is designed to provide a tax benefit for the duration of a standard four-year degree program, and even if a student takes longer to finish a bachelor's degree, the AOTC is capped at four years.

The AOTC has income restrictions. To claim the full credit, the taxpayer (not the student) must have modified AGI (MAGI), which is a form of AGI specific to certain tax breaks of $160,000 or less if filing a joint return, or $80,000 or less for other filing statuses. The ability to claim the credit disappears entirely above MAGI of $180,000 and $90,000, respectively.

For taxpayers who qualify, the AOTC can be very valuable. The credit is worth 100% of the first $2,000 of qualified expenses, and 25% of the next $2,000, for a maximum of $2,500 per student. And, as much as $1,000 of the credit is refundable even if your tax liability is zero.

6. Lifetime Learning Credit. In many ways, the Lifetime Learning Credit, or LLC, is far less restrictive than the AOTC. Specifically, students don't need to be pursuing a degree, certificate, or other credential. Nor do they need to be enrolled on a half-time basis or within the first four post-secondary years. If you decide to take a single class solely for the purpose of professional development or personal enrichment, you could qualify for the LLC.

On the other hand, the LLC is more restrictive when it comes to the taxpayer's income. For the 2018 tax year, taxpayers filing joint returns need to have MAGI of $112,000 or less to claim the full credit, or $56,000 or less for all other filing statuses. The credit phases out completely above MAGI of $132,000 and $66,000, respectively.

If you qualify, the Lifetime Learning Credit is worth as much as 20% of the first $10,000 of qualifying expenses, for a maximum credit of $2,000 per year. Unlike the AOTC, the Lifetime Learning Credit is not refundable.

7. Medical Savings Accounts (MSA). For 2019, a high-deductible health plan (HDHP) is one that, for participants who have self-only coverage in an MSA, has an annual deductible that is not less than $2,350 but not more than $3,500; for self-only coverage, the maximum out-of-pocket expense amount is $4,650. For 2019, HDHP means, for participants with family coverage, an annual deductible that is not less than $4,650 but not more than $7,000; for family coverage, the maximum out-of-pocket expense limit is $8,550.

8. Adoption Credit.    One of the most valuable tax breaks of all to parents who qualify, the Federal Adoption Tax Credit is designed to ease the financial burden of adopting an eligible child who is either under 18 years old or physically or mentally incapable of caring for themselves. Adoption can be expensive -- attorney fees, adoption agency fees, court costs, travel expenses, and more can really add up.

For 2018, the Federal Adoption Tax Credit is worth as much as $13,810, so it's fair to say that it can go a long way toward covering these and other costs associated with the adoption process. In addition, the credit is per child, so if you adopt, say, two siblings, you can claim the credit for each child.

For the 2018 tax year, the Federal Adoption Tax Credit begins to phase out for MAGI above $207,140, regardless of your filing status, and disappears completely for taxpayers with MAGI above $247,140.

9. The Retirement Savings Contributions Credit (The Saver's Credit)

There's a tax credit designed to encourage Americans with modest incomes to save money for retirement, known as the Retirement Savings Contributions Credit, or informally as the Saver's Credit.

If you contribute to a tax-advantaged retirement account such as a traditional or Roth IRA, 401(k), 403(b), Thrift Savings, SEP-IRA, or 457, just to name some popular examples, you could literally get free money for saving for retirement.

The Saver's Credit is worth 10%, 20%, or 50% of as much as $2,000 in retirement savings contributions for those who qualify. If you're married, both spouses can take advantage. This makes the maximum credit $1,000 for individuals and $2,000 for couples, depending on income. And, this is a nonrefundable credit. (Note: From this point on, assume all credits are nonrefundable unless otherwise noted.)

10. Plug-In Electric Vehicle Credit -  If you buy a qualifying plug-in electric vehicle, you may qualify for the Plug-In Electric Vehicle Credit. This credit applies to fully electric cars as well as plug-in hybrid vehicles.

For qualifying vehicles, the size of the credit depends on the battery capacity of the vehicle. The minimum amount of the Plug-In Electric Vehicle Credit is $2,500 for a vehicle with 5 kilowatt hours of battery capacity, with an additional $417 for each kilowatt hour of capacity beyond five. The credit maxes out at $7,500 per eligible vehicle.

The credit begins to phase out for each manufacturer when they have sold at least 200,000 qualifying vehicles. Tesla recently became the first manufacturer to hit the milestone, and its $7,500-per-vehicle credit will drop to $3,750 on Jan. 1, 2019, then to $1,875 on July 1, 2019, and will go away completely on Jan. 1, 2020.

Tax credits can be very valuable if you qualify. As you can see, tax credits can be extremely valuable if you qualify, especially if you're eligible for a combination of a few different credits. As an example, a taxpayer who can take the Child Tax Credit for two of their three children, the Child and Dependent Care Credit for one and the American Opportunity Credit and the Credit for Other Dependents for their oldest child, and the Lifetime Learning Credit for their own continuing education could see nearly $10,000 come off their 2018 tax bill when they file their return in 2019.

Finally, it's also worth mentioning that some states have their own tax credits, many of which overlap with the credits on this list. For example, several states offer their own electric vehicle tax credits, which can be combined with the federal Plug-In Electric Vehicle Credit. California, for instance, offers electric vehicle buyers a $2,500 rebate, so people who buy a qualifying vehicle in the state can end up saving a total of $10,000.

Call Us, Angular Financial now to take advantage of these credits and get you more this year!

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