Earned income tax credit
This credit is a refundable tax credit for low to moderate income working individuals and couples, including those with self-employment.
Example: J.T Doe files his 2017 tax return in early 2018. Without the EITC, J.T would owe $500 in tax. J.T’s EITC amount is $1,200. Therefore, his $500 obligation is wiped out, and J.T would receive a check from the IRS for the $700 balance. (Most tax credits are not refundable, meaning that they do no
more than offset any tax obligation.)
Besides having earned income, there are several other hurdles to clear to get the EITC. They include age (at least age 25, but under 65), investment income (no more than $3,500 in 2018), and filing status (married, filing separately, not eligible).
In addition, there are income limits for the EITC; those limits vary by filing status and by the number of qualifying children. (The definition of qualifying children is very broad for EITC purposes.) This year, for instance, a married couple filing a joint tax return with two qualifying children must have both earned income and adjusted gross income (AGI) of less than $51,598 to get this credit.
EITC amounts vary, as well. The 2018 maximum credit is $6,444 for a recipient with three or more qualifying children.
Child tax credit
For the child tax credit, the definition of a child is a bit more limited than it is for the EITC. Although the EITC can cover students under age 24, the child tax credit does not go beyond age 16. Other requirements apply.
The maximum tax credit is $1,000 for each qualifying child. This credit
phases out after the taxpayer’s income exceeds a threshold amount based on his or her income. The threshold amount depends on filing status—to get the maximum credit, for instance, a couple filing a joint return must have modified adjusted gross income (MAGI) of no more than $110,000. Above the threshold, the child tax credit drops by $50 per $1,000 of MAGI. Under a tax code provision known as the additional child tax credit, some of the credit may be refundable, depending on the amount of the taxpayer’s earned income.
Child and dependent care tax credit
As the name indicates, this credit has two broad applications. One is for taxpayers who have children under age 13 and the other is for those who have spouses, dependents, or certain other individuals
who are physically or mentally incapable of self-care. Either way, the credit is a portion of amounts paid to a caregiver so that the taxpayer can go to work, actively look for work or go to school.
To calculate this credit, start by finding the amount spent on qualifying care for a given calendar year. Here, the maximum amount that counts is $3,000 for one qualifying person and $6,000 for two or more people needing care.
However, this maximum credit amount may be limited for some individuals. The maximum amount is limited, in the case of a single individual, to the individual’s earned income for the year. In the case of a married individual, the maximum amount is limited to the lesser of the individual’s earned income or the earned income of the individual’s spouse. In addition, if the individual receives dependent care benefits that he or she excludes from income, the maximum credit amount is reduced by the amount of the dependent care benefits excluded.
This resulting amount is multiplied by a percentage that depends on your AGI. The minimum percentage, used by many who claim this credit, is 20%, which applies when AGI is $43,000 or more. Example: J.T and Jane Doe, who have $100,000 in AGI, pay over $6,000 to caregivers for their two children this year. Therefore, the Doe’s multiply the maximum amount ($6,000) by the minimum percentage (20%) to get $1,200, the amount of this tax credit they can claim. (Claimants may also be responsible for payroll tax reporting in some situations.)
More credits, more assistance Many other tax credits are available, including some for higher education.
For all of them, the rules go beyond these brief descriptions. Our office can help you plan to make the most of these dollar-for-dollar tax savers.