The government has also drafted legislation that intentionally helps taxpayers Know more save money. Unlike tax loopholes, this legislation is often drafted a part of a social safety net or a relief package that aims to stimulate the economy. Here are five common tax credits that save taxpayers money.
Saver’s Tax Credit
Working-class Americans who manage to put together some savings can claim the Saver’s Tax Credit when they fill out their returns. It’s a tax break designed to give people an incentive to save money. This is especially important because so many people lack an emergency fund and have zero or insufficient retirement savings. The Saver’s Tax Credit is not refundable. It can reduce your tax bill to zero, but if the amount of your credit is greater than what you owe the IRS you won’t get the difference refunded to you.
Earned Income Tax Credit
If you have a job but it’s not bringing in much income you can claim the Earned Income Tax Credit (EITC). Like any tax credit, the EITC directly reduces your tax bill by the size of the credit. Unlike the Saver’s Tax Credit, the EITC is refundable. If the amount of the EITC is greater than the amount you owe the IRS, you’ll get the difference refunded to you. The EITC has been very successful in reducing poverty among working-class families.
American Opportunity Tax Credit
The American Opportunity Tax Credit provides a tax credit for eligible students participating in a higher education program after high school. You can get 100% of the credit on your first $2,000 of annual educational expenses and 25% of the credit on the next $2,000 in expenses per student.
Even if the qualifying educational expenses are more than $4,000 per year, you can only receive a maximum credit of $2,500 per year for each student for a maximum of four years. The credit is also partially refundable if the credit ultimately brings your total tax bill to $0. In this case, you may be able to receive up to 40% of the credit amount (up to $1,000) refunded to you.
Lifetime Learning Credit
This credit is for qualified tuition and related expenses paid for eligible students enrolled in an eligible educational institution. This credit can help pay for undergraduate, graduate and professional degree courses — including courses to acquire or improve job skills. There is no limit on the number of years you can claim the credit. It is worth up to $2,000 per tax return.
Child Tax Credit
This credit is designed to give an income boost to the parents or guardians of children and other dependents. The credit is worth up to $2,000 for the 2024 and 2025 tax year (up to $1,700 per child is refundable). The credit phases out for wealthier families.
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