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Tax Credits for Low to Moderate Taxpayers/Earners

Tax credits are dollar for dollar deductions that are subtracted from the total amount of taxes you owe. For example, if you owed $2,000 in federal income tax and you had a tax credit for $1500, you would send the IRS $500 to clear your tax bill.

If the tax credit is refundable and exceeds the amount of the taxes you owe, you can get the remaining amount as a refund. For example, if owed $2,000 in federal income tax and your tax credit was $2,600. You would get a check for $600.

If the credit is not refundable, any excess beyond the taxes owed is loss. For example, your tax bill is $2,000. Your tax credit is $2500. You would not get the remaining $500 left that exceeded your tax bill.

Additional child tax credit

The additional child tax credit is a refundable credit that is generally available to taxpayers with three or more qualifying children and who meet other income guidelines. The additional child tax credit was created to reimburse taxpayers for the non-refundable portion of the child tax credit which exceeded their tax bill.

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Child and dependent care credit

A non-refundable credit available to taxpayers for expenses paid for childcare (age 13 or under) and or dependant care (persons physically or mentally incapable of self-care) which allow the taxpayer to work.

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Child tax credit

Credit taxpayers receive for each dependent child age 17 or lower at the end of the tax year. This credit is not refundable and is phased out after certain income levels.

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Credit for the elderly and disabled

A non-refundable tax credit for taxpayers who are age 65 or over who are permanently and totally disabled as certified by a doctor.

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Earned income tax credit (EIC)

A refundable tax credit available to low wage earners. Age and income limits apply. The size of the credit depends on your income, age and whether you have a qualifying child.

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Education Credits

Education tax credits can offset some costs of higher education for yourself or a dependent. Two education credits are the Hope Credit and the Lifetime Learning Credit.

  • American Opportunity Credit - Applies for the first four years of post-secondary education, such as college or vocational school. It does not apply to graduate programs, or to professional-level programs
  • Lifetime Learning Credit - Applies to undergraduate, graduate and professional degree courses, including instruction to acquire or improve job skills, regardless of the number of years in the program.

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Non-refundable Tax Credit

A tax credit that can reduce your tax bill to zero. Any credit left after the bill reaches zero is lost.

If the credit is not refundable, any excess beyond the taxes owed is loss. For example, your tax bill is $2,000. Your tax credit is $2500. You would not get the remaining $500 left that exceeded your tax bill.

Examples of non-refundable credits

  • Child and Dependant Care Credit
  • Child Tax Credit
  • Elderly and Disabled Credit
  • Retirement Saver's Credit

Refundable tax Credit

A credit that can reduce your tax bill to zero and if there is any amount left, that portion of the credit is refunded to you. For example, if owed $2,000 in federal income tax and your tax credit was $2,600. You would get a check for $600.

Examples of refundable tax credits

  • Additional child tax credit
  • Earned income tax credit

Retirement saver's credit

A non refundable credit available to low to moderate earners who contribute to a qualified retirement account (e.g. 401K, 403b, IRAs-traditional and Roth). The amount of the credit depends on the adjusted gross income of the individual or household and the size of the contribution.

Eligible taxpayer must be at least 18 years old. Individuals that are full-time students, were full-time students for at least five months of the year, or filed as dependents are not eligible.

More information from the IRS