Recently, Mother Nature temped us with spring temperatures here in the Heartland. After a few days of open windows, patio drinks and outside workouts, winter weather returned, but that dose of Vitamin D served as a sunny reminder that the seasons are soon to change – and the end of Tax Season is near.
Even with a few extra days to file, this year’s deadline of April 18 is just a page on the calendar away, so if you haven’t already finished your return it’s time to get started! As with most areas of personal finance (and life in general), being organized and allocating enough lead time to assembling and preparing your return will reward you in the end.
When you’re pulling together all of the important paperwork to document and include in your return, there are two considerations to keep in mind that will help you maximize your tax return and ensure you’re paying only what you owe or getting the biggest refund back: deductions and credits.
A deduction is a qualifying expense which reduces your taxable income by the same percentage as your tax rate. This means, if you fall into the 25% tax bracket ($37,651-$91,150 for a single person or $75,301-$151,900 for married couples filing jointly) a $1,000 deduction saves you $250. We detailed common deductions earlier this year in the post The Top 7 Tax Deductions to Maximize Your Return in 2017.
A credit lowers your tax bill dollar for dollar, so a $1,000 credit reduces your tax bill by $1,000 no matter your tax bracket. There are two types of credits, refundable and nonrefundable. Nonrefundable credits allow you to reduce your tax liability to zero, but any overage will not result in a tax refund. Any surplus from refundable credits can come back to you as a refund.
Child Tax Credits – This is a nonrefundable credit of up to $1,000 for each qualifying child. Qualifying children must be related to you, under 17 years old, eligible for you to claim as a dependent, and live with you more than six months out of the year. You must also provide at least half of the financial support for the child.
Earned Income Tax Credit (EITC) – Offers savings to lower income workers and families. The Internal Revenue Service website provides resources for determining your eligibility for this refundable credit.
Adoption Credit – If you adopted a child domestically, internationally or from foster care, you may be able to take a nonrefundable credit of up to $13,460 for qualified expenses incurred, including adoption fees, court costs, attorney fees, and travel expenses. If you adopted a special needs child, you may be able to take the credit even if you didn’t incur any adoption expenses. Step-child adoptions are excluded from this benefit.
Energy Savings Credit – You may qualify for a credit if you installed a solar, wind or geothermal mechanism for energy collection and use in your home, or purchased a fuel cell or electric vehicle.
Retirement Savings Contributions Credit (Saver’s Credit) – This credit rewards lower income tax payers for making eligible contributions to their traditional or ROTH IRA or employer-sponsored retirement plan. The amount of the non-refundable credit is 50, 20 or 10 percent of retirement contributions up to $2,000 (or $4,000 if married filing jointly), based on adjusted gross income.
Child and Dependent Care Credit – If you have a child under the age of 13 or are responsible for a physically or mentally disabled adult who required and received day care by a non-related provider while you and your spouse worked or looked for work, you may qualify for this credit.
The amount of your credit is based on how much you spent (less any employer provided child or dependent care benefits, including pre-tax flexible spending account dollars), as well as your income. The higher your income the lower the percentage of costs you can claim, though even those in the top tax bracket can claim 20% of their costs. Maximum credit is $3,000 for one child or dependent adult enrolled in day care, or $6,000 for two or more.
American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC) – AOTC is a credit for tuition paid by you or through borrowed funds, such as student loans, for the first four years of college. You can get a maximum annual credit of $2,500 per eligible student in your family. If the credit brings the amount of tax you owe to zero, you can receive 40 percent of any remaining amount of the credit (up to $1,000) as a refund. To qualify for the AOTC, the student must be pursuing a college degree, be enrolled at least half time for at least one academic period during the calendar year, not have claimed the AOTC or the former Hope Credit for more than four years, and not have a felony drug conviction.
Non-degree seeking students may claim the LLC for courses taken at an accredited institution to develop or improve their job skills. There is no limit on the number of years you can claim the non-refundable LLC, which is worth up to $2,000 annually. Between the AOTC and the LLC, the LLC has a much lower income maximum. You cannot claim the AOTC and the LLC in the same year. You cannot claim either the AOTC or the LLC if your education expenses were reimbursed by an employer or funded through grants or scholarships.
The deadline for filing your 2016 return is April 18, so you have three extra days this year to make sure you’ve accounted for every single credit and deduction that will benefit you.
And if you’re filing online, don’t forget to use a portal! Both Ebates and MrRebates.com offer cash back from H&R Block and TurboTax online or you can earn 1,000 miles by going through Southwest’s Rapid Rewards shopping portal.
Disclaimer: Many of the credits mentioned above have income minimums or maximums, as well as other qualifying criteria not expressly mentioned. I am not a tax or accounting expert, so I encourage you to seek the advice of a professional to confirm your individual eligibility for these and other credits and deductions.