Tax Credits Guide for 2023-2024

On February 16, 2025 By newsroom Topic: Taxes

Tax credits are powerful tools that reduce your tax bill on a dollar-for-dollar basis. They can lower the amount you owe or even increase your refund. Here's a detailed breakdown of tax credits, how they work, and the most popular ones for 2023-2024.

1. What Is a Tax Credit?

Definition: A direct reduction in taxes owed.
Types:
Nonrefundable: Reduces your tax liability but doesn’t provide a refund for unused portions.
Refundable: Provides a refund if the credit exceeds taxes owed.
Partially Refundable: Part of the unused credit can be refunded.
Key Difference from Deductions: Credits directly lower taxes owed, while deductions reduce taxable income.

2. How Tax Credits Work

Nonrefundable: Example: A $500 credit reduces your tax liability by $500 but doesn’t result in a refund if your liability is zero.
Refundable: Example: If you owe $500 but qualify for a $700 refundable credit, you get a $200 refund.
Partially Refundable: Example: A $1,000 credit with a $500 refundable portion provides a refund if taxes owed are less than $1,000.

3. Popular Tax Credits

These credits apply to returns due April 15, 2024 (or October 15, 2024, with an extension).

A. Tax Credits for People With Kids

Child Tax Credit
Value: Up to $2,000 per child ($1,600 refundable).
Eligibility:
- Income below $400,000 (married filing jointly) or $200,000 (other filers).
- Phases out at higher incomes.
Child and Dependent Care Credit
Value: Covers up to 35% of $3,000 in care expenses for one dependent ($6,000 for two or more).
Eligibility: For dependents under 13 or dependents unable to care for themselves.
Adoption Credit
Value: Up to $15,950 per child.
Eligibility: Phases out at incomes above $239,230; not available for adopting a spouse’s child.

B. Tax Credits for Low-to-Middle-Income Households

Earned Income Tax Credit (EITC)
Value: Up to $7,430, depending on income, filing status, and number of children.
Eligibility:
- Income limit: $63,398 or less.
- Excludes those with over $11,000 in investment income.
Premium Tax Credit
Value: Helps offset health insurance costs through qualified marketplace plans.
Unique Feature: Can be taken in advance or claimed when filing.

C. Tax Credits for Retirement Savings

Saver’s Credit
Value: 10%-50% of up to $2,000 in contributions to IRAs, 401(k)s, or similar plans ($4,000 for joint filers).
Eligibility: Income limits:
- $73,000 (married filing jointly).
- $54,750 (head of household).
- $36,500 (single).

D. Tax Credits for Education

American Opportunity Tax Credit
Value: Up to $2,500 per student (partially refundable: up to $1,000).
Eligibility: For the first four years of college; student must be enrolled at least half-time.
Lifetime Learning Credit
Value: Up to $2,000 per tax return for tuition, fees, and related expenses.
Eligibility: Available for undergraduate, graduate, or non-degree courses.

E. Tax Credits for Green Purchases

Residential Energy Tax Credits
Energy Efficiency Improvements: Up to $3,200 for upgrades like windows, doors, or heat pumps.
Solar Tax Credit: 30% of costs for solar panels, water heaters, or battery storage.
Electric Vehicle Tax Credit
Value: Up to $7,500 for new EVs; $4,000 for used EVs.

4. How to Claim Tax Credits

Use tax software or consult a tax professional for guidance.
Provide necessary documentation (e.g., receipts, income proof).
Ensure eligibility by meeting specific criteria for each credit.

5. Pro Tips for Maximizing Tax Credits

File Early: Avoid last-minute mistakes or missed credits.
Use Tax Software: Tools like NerdWallet Taxes simplify the process.
Track Changes: Tax laws update annually; stay informed about new credits.
Consult Experts: For complex situations, seek advice from a tax professional.

Bottom Line: Tax credits can save you significant money. Whether you're a parent, student, eco-conscious buyer, or retiree, understanding and utilizing tax credits is key to maximizing your refund or reducing taxes owed.