Deductions are a great way to help save money on taxes. Although tax credits are not deductions, they can save you even more. Tax credits reduce your bill dollar for dollar, whereas deductions only decrease your bill a fraction for every dollar. These tax credits often get overlooked and can help families save at tax time.
1. Child and Dependent Care Tax Credit (CDCTC)
This credit allows up to $6,000 to be claimed on your taxes for childcare costs for dependents under 17. However, if you have a tax-favored childcare reimbursement account through your employer, you cannot count that amount for the credit. For example, if you run the maximum $5,000 through a tax-favored account, you can only claim $1,000 of the credit.
The law for 2021 (affecting what you file in 2022) has changed, allowing for a higher percentage of qualifying expenses, an increase in the credit amount and new tiers based on your adjusted gross income. To find out how these changes may affect your specific situation, contact us and we’ll help determine the best way for you to make the most of your available credits.
2. Dependent Tax Credit
In addition to the childcare credit and the well-known child tax credit (which allows up to $2,000 in credits for children under 16), there is also a credit for dependents over 16. This $500 credit may apply to children in college or older relatives that you care for in your home. However, both the child tax credit and the dependent tax credit are not applicable if your AGI is over $200,000 (or $400,000 if you’re married filing jointly).
3. Earned Income Tax Credit (EITC)
This credit benefits individuals with a low to moderate income level. However, many tax filers fail to take full advantage of it. You might qualify if you lost a job, took a pay cut or cut your working hours. The rules for this can be complicated and vary depending on your marital status, income and the size of your family. An estimated 25% of eligible taxpayers miss out on this credit, so it’s worth checking with one of our tax specialists to see if you qualify (and for how much!).
If you have questions about how these credits or other tax laws might affect you, please contact our office. Our specialists will be glad to talk through your unique situation.
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