Westchester NY accountant Paul Herman of Herman & Company CPA’s has all the answers to your personal finance questions! Millions of Americans forgo critical tax relief each year by failing to claim the Earned Income Tax Credit (EITC), a federal tax credit for individuals who work but do not earn high incomes. Taxpayers who qualify and claim the credit could pay less federal tax, pay no tax or even get a tax refund.
Last year, an estimated 21 million taxpayers received approximately $37.5 billion in EITC. However, the IRS estimates that 25 percent of people who qualify don’t claim the credit and at the same time, there are millions of Americans who have claimed the credit in error, many of whom simply don’t understand the criteria.
EITC is based on the amount of your earned income and the number of qualifying children in your household. If you have children, they must meet the relationship, age and residency requirements. And, you must file a tax return to claim the credit.
Are you eligible for any of these tax credits?
Taxpayers should consider claiming tax credits for which they might be eligible when completing their federal income tax returns, advises the IRS. A tax credit is a dollar-for-dollar reduction of taxes owed. Some credits are refundable – taxes could be reduced to the point that a taxpayer would receive a refund rather than owing any taxes. Below are some of the credits taxpayers could be eligible to claim:
- Earned Income Tax Credit This is a refundable credit for low-income working individuals and families. Income and family size determine the amount of the EITC. When the EITC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit. For more information, see IRS Publication 596, Earned Income Credit (EIC).
- Child Tax Credit This credit is for people who have a qualifying child. The maximum amount of the credit is $1,000 for each qualifying child. This credit can be claimed in addition to the credit for child and dependent care expenses. For more information on the Child Tax Credit, see Pub. 972, Child Tax Credit.
- Child and Dependent Care Credit This is for expenses paid for the care of children under age 13, or for a disabled spouse or dependent, to enable the taxpayer to work. There is a limit to the amount of qualifying expenses. The credit is a percentage of those qualifying expenses. For more information, see Pub. 503, Child and Dependent Care Expenses.
- Adoption Credit Adoptive parents can take a tax credit of up to $13,170 for qualifying expenses paid to adopt an eligible child. For more information, see Pub. 968, Tax Benefits for Adoption.
- Credit for the Elderly and Disabled This credit is available to individuals who are either age 65 or older or are under age 65 and retired on permanent and total disability, and who are citizens or residents. There are income limitations. For more information, see Pub.524, Credit for the Elderly or the Disabled.
- Education Credits There are two credits available, the American Opportunity Credit (formerly called the Hope Credit) and the Lifetime Learning Credit, for people who pay higher education costs. The American Opportunity Credit is for the payment of the first two years of tuition and related expenses for an eligible student for whom the taxpayer claims an exemption on the tax return. The Lifetime Learning Credit is available for all post-secondary education for an unlimited number of years. A taxpayer cannot claim both credits for the same student in one year. For more information, see Publication 970, Tax Benefits for Education.
- Retirement Savings Contribution Credit Eligible individuals may be able to claim a credit for a percentage of their qualified retirement savings contributions, such as contributions to a traditional or Roth IRA or salary reduction contributions to a SEP or SIMPLE plan. To be eligible, you must be at least age 18 at the end of the year and not a student or an individual for whom someone else claims a personal exemption. Also, your adjusted gross income (AGI) must be below a certain amount. For more information, see chapter four in Publication 590, Individual Retirement Arrangements (IRAs).
There are other credits available to eligible taxpayers. Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!
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