Commonly Missed Tax Credits

Adoption Credit

If you adopted a child, you may be able to take a credit for qualified adoption expenses of up to $12,650 per child. If you adopted a special needs child, you may claim a credit of $12,650 regardless of your expenses.  The credit reverts back to a non-refundable credit with the ability to carry over any unused credit for five years beginning with tax year 2012.  Tax returns with the Adoption Credit cannot be electronically filed for tax year 2012.

American Opportunity Credit (usually best credit to take) extended through 2017

  • It is a refundable credit.
  • Available to a broad range of taxpayers, including many with higher incomes and those who owe no tax.
  • You may be eligible even with no income.
  • It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four post-secondary education years instead of two.
  • Many of those eligible will qualify for the maximum annual credit of $2,500 per student.
  • The full credit is available to individuals, whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return.
  • Can be taken for 4 years as opposed to 2 years for hope credit.

Hope Credit – The American Opportunity Credit replaces this credit at least until 2017 or per IRS regulations.

You cannot take both an education credit and a deduction for tuition and fees (see deductions below) for the same student in the same year. In some cases, you may do better by claiming the tuition and fees deduction instead of the Hope credit. Education credits are claimed on Form 8863. For details on these and other education-related tax breaks, see IRS Publication 970, Tax Benefits of Education.

Lifetime Learning Credit

  • The lifetime learning credit helps parents and students pay for post-secondary education. For the tax year, you may be able to claim a lifetime learning credit of up to $2,000 for qualified education expenses paid for all students enrolled in eligible educational institutions.
  • There is no limit on the number of years the lifetime learning credit can be claimed for each student. However, a taxpayer cannot claim both the Hope and American opportunity credit and lifetime learning credits for the same student in one year. Thus, the lifetime learning credit may be particularly helpful to graduate students, students who are only taking one course and those who are not pursuing a degree.

Generally, you can claim the lifetime learning credit if all three of the following requirements are met:

  • You pay qualified education expenses of higher education.
  • You pay the education expenses for an eligible student.
  • The eligible student is yourself, your spouse or a dependent for which you claim an exemption on your tax return.

If you’re eligible to claim the lifetime learning credit and are also eligible to claim the Hope or American opportunity credit for the same student in the same year, you can choose to claim either credit, but not both. If you pay qualified education expenses for more than one student in the same year, you can choose to take credits on a per-student, per-year basis. This means that, for example, you can claim the Hope or American opportunity credit for one student and the lifetime learning credit for another student in the same year.

Deductions Tuition and Fees Deduction

You may be able to deduct qualified education expenses paid during the year for yourself, your spouse or your dependent. You cannot claim this deduction if your filing status is married filing separately or if another person can claim an exemption for you as a dependent on his or her tax return. The qualified expenses must be for higher education

  • It is a nonrefundable credit and is based on qualified tuition and fees paid at an accredited post-secondary institution
  • As a general rule the institution must offer aid to be accredited.
  • The credit is available every year a member of your family pays for any qualified education expenses.

Child and Dependent Care

  • Dependent child must be under age 13.
  • If Married Filing Joint both must work unless one taxpayer is disabled you may be able to claim a credit for these expenses.
  • This nonrefundable credit is calculated based on your dependent care expenses and your income.
  • The maximum credit is $1,050 for the expenses for one qualifying child or $2,100 for more than one child.
  • As a general rule it usually calculates to be around 20% of expense paid up to the maximums above.

Child Tax Credit

  • You may qualify for a credit of up to $1,000 per qualifying child.
  •  A qualifying child is an individual who is under age 17 at the end of the year.
  • Must be claimed as a dependent, such as a son, daughter, step child, adopted child, grandchild or eligible foster child.

Earned Income Credit

  • The Earned Income Credit is a refundable credit for persons with earned income.
  • The Earned income Credit is based on the amount of your earned income.
  • The credit is available for taxpayers with or without children.

You could be entitled to a refundable credit up to;

  • $3,169 (if you have one qualifying child),
  • $5,236 (if you have two qualifying children),
  • $5,891 (if you have more than two children),
  • $   475 (if you have no qualifying children)

The amount is calculated on the amount of income you earn. Earned income is income paid to you for;

  •  taxable earned wages
  •  salaries
  •  tips
  •  union strike benefits,
  • long-term disability benefits received prior to minimum retirement age
  • and net earnings from self-employment
  • Combat pay – You may elect to include taxable combat pay in earned income for the Earned Income Credit purposes. The ability to decide whether to include the combat pay enables you to choose the largest possible Earned Income Credit.

If you qualify for the Earned Income Credit, it reduces the tax you owe. The credit is refundable if your withholdings and Earned Income Credit amount are greater than the tax liability you may have on your tax return.
There is a limit on the amount of investment income such as Royalties. If you exceed this limit it disqualifies you from receiving Earned Income Credit.

Excess Social Security Tax – Railroad Retirement Tax (RRTA)

The amount an individual must pay in 2013 is $4,624.20. If you worked for one employer and paid more than $4,624.20, you must contact your employer for a refund of the overpayment. If you worked for more than one employer and the combined total of your Social Security taxes or RRTA is greater than the maximum amount, you may claim the excess taxes paid as a refundable credit on your tax return.

Foreign Tax Credit

If your Form 1099-INT or Form 1099-DIV shows you paid foreign taxes, you may be eligible to claim either a credit or an itemized deduction for these taxes. Generally, the foreign tax credit results in a greater tax savings than deducting the foreign taxes as an itemized deduction.

Residential Energy Efficient Property Credits

The residential energy efficient property credits are available each year in full, may not be carried over and may offset the AMT. To qualify for the credits, the home must be the taxpayer’s principal residence, must be located in the U.S., and the property or improvements must have a reasonable life expectancy of at least five years. These credits are available on the installation of:

  • Solar water heating system, limited to 30% of the cost. Note: Not available for spa or pool water heating systems.
  • Solar energy production system, limited to 30% of cost.
  • Qualified fuel cell power plant, limited to 30% of cost.

Retirement Savings Contributions

This credit could lower your taxes depending on your income. It’s best to check with your tax profession for the possible saving before the April deadline. The credit could save taxes on State as well as Federal returns. If you contribute to an IRA or an employer-provided retirement account, such as a 401(k), you may be eligible for a credit. The credit is based on up to $2,000 of your contribution for the year. You must be age 18 or older to claim the credit and you cannot be a student or claimed as a dependent on another’s return. The credit is in addition to any deduction or exclusion from income for the contribution.

Credit for the Elderly and Disabled

There is much to be said and read regarding this credit. Generally speaking you must be 65 or over and your income is very limited. The only way to be sure is simply file Schedule R. The high end of the credit usually doesn’t exceed $200 and there are many qualifications and rules. Clink here for the IRS website for publications loaded with lots of information.

Other Credits

For more information or for any deductions or Credits not discussed here – Click Here

Tax Situations vary with each return. Deductions may not apply to you.