Tax Planning Tools

FAQs on Tax Credits

Can I take the credit for the elderly or disabled?

This federal income tax credit is available if you are a qualified individual and your income falls within specified limits. You are a qualified individual if you are either (1) age 65 or older at the end of the tax year or (2) are under age 65 and retired on permanent and total disability. You must also be a U.S. citizen or resident to qualify for the credit. If you are married, you and your spouse must file a joint tax return to qualify. However, if you and your spouse lived apart for the entire year, you have the option of filing either a joint return or separate returns.

Qualifying on the basis of age is straightforward. To qualify as disabled, though, you should note that the IRS considers you retired on disability as of the date you stopped working because of your disability. You are considered permanently and totally disabled if (1) you can’t engage in any substantial gainful activity due to either your physical or mental condition and (2) the condition has lasted or will last for a continuous period of not less than one year (or is expected to result in death). You should obtain a physician’s statement certifying your disability.

To qualify for the credit, you must also meet income requirements. Your income and nontaxable Social Security (or other nontaxable pension) must fall below specified amounts that vary with your filing status.

For more information, see Schedule R of your Form 1040.

Can I take the tax credit for child care?

The child and dependent care credit is a tax credit for up to 35 percent of certain expenses you paid to provide care for your dependent child, your disabled spouse, or a disabled dependent while you worked or looked for work. To be eligible for the credit, you must care for a qualifying person, incur work-related expenses, and have earned income.

A qualifying person is:

  • Your dependent who was under the age of 13 when the care was provided and for whom you can claim an exemption, or
  • Your dependent who was physically or mentally unable to care for himself or herself and for whom you can claim an exemption (or for whom you could have claimed an exemption but for the income test), or
  • Your spouse who is physically or mentally unable to care for himself or herself, or
  • In certain cases, a dependent claimed by a divorced spouse
  • Child and dependent care expenses must be work related to qualify for the credit. That is, the expenses must allow you to work or look for work. If you are married, you must file a joint tax return and both you and your spouse must generally work or look for work. (Your spouse is treated as working during any month he or she is employed, or is a full-time student, or is physically or mentally unable to care for himself or herself.)

    Your child and dependent care credit is a percentage of a portion of your work-related expenses. The qualifying expenses on which the tax credit is based are limited to $3,000 for one qualifying dependent, and $6,000 for more than one qualifying individual. The percentage used in calculating the credit is gradually reduced as adjusted gross income (AGI) exceeds $15,000. If your AGI exceeds $43,000, your credit is limited to the minimum allowed by this law–20 percent of qualifying work-related expenses.

    For additional details, consult a tax professional.

  • Now that my child is in college, am I entitled to any education tax credits?

    You may be. There are two education tax credits–the American Opportunity credit, worth up to $2,500, and the Lifetime Learning credit, worth up to $2,000. To claim either credit in a given year, you must list your child as a dependent on your tax return. In addition, you must meet income limits.

    For 2016, the maximum American Opportunity credit is available to single filers with a modified adjusted gross income (MAGI) below $80,000 and joint filers with a MAGI below $160,000. A partial credit is available to single filers with a MAGI between $80,000 and $90,000 and joint filers with a MAGI between $160,000 and $180,000. For 2016, the maximum Lifetime Learning credit is available to single filers with a MAGI below $55,000 and joint filers with a MAGI below $111,000. A partial credit is available to single filers with a MAGI between $55,000 and $65,000 and joint filers with a MAGI between $111,000 and $131,000.

    Now, what credit might you be eligible for? The American Opportunity credit applies to the first four years of undergraduate education and is worth a maximum of $2,500. It is calculated as 100% of the first $2,000 of your child’s annual tuition and related expenses, plus 25% of the next $2,000 of such expenses. To qualify for the credit, your child must be attending college on at least a half-time basis.

    The Lifetime Learning credit is worth a maximum of $2,000 per year. It is calculated as 20% of the first $10,000 of your child’s annual tuition and related expenses. Unlike the American Opportunity credit, the Lifetime Learning credit is available even if your child is enrolled on less than a half-time basis.

    One important rule to know is that you cannot claim both credits in the same year for the same student. As a result, you will need to determine which credit offers you the most benefit in a given year. In this analysis, there is an important distinction between the two credits. The American Opportunity credit can be taken for more than one child in a given year, provided each child qualifies independently. For example, if you have two children in college, one a freshman and the other a sophomore, you can take a $5,000 credit on your tax return. By contrast, the Lifetime Learning credit is limited to $2,000 per tax return, even if you have multiple children who would qualify independently in the same year.

    What are the Hope credit and the Lifetime Learning credit?

    The Hope credit (renamed the American Opportunity credit) and the Lifetime Learning credit are tax credits for taxpayers who pay certain higher education costs. These credits depend on the amount of qualified tuition and related expenses you paid in a given year, as well as the level of your modified adjusted gross income (MAGI). The credits are available for qualified education expenses that you, your spouse, or your dependent incur at an eligible educational institution. The IRS has provided specific guidance regarding the definitions of eligible educational institution and qualified expenses.

    The American Opportunity credit is worth up to $2,500 per student for qualified tuition and related expenses incurred during the first four years of post-secondary education. The credit does not apply to graduate or professional-level courses. To qualify, you must be enrolled in a degree or certificate program at least half-time, and you must not have a felony drug conviction. The credit is available for each eligible student in the household. The credit is calculated as 100 percent of the first $2,000 of qualified tuition and related expenses, plus 25 percent of the next $2,000 of such expenses. A portion of the credit may be refundable, which means you may be able to have a portion of the credit refunded to you if total tax credits exceed total tax liability.

    The Lifetime Learning credit is worth up to $2,000 per year for qualified tuition and related expenses incurred for course work at eligible educational institutions. You need only be enrolled in one or more courses to qualify. The credit is also available for graduate and professional-level courses. Furthermore, courses related to sports, games, or hobbies may qualify if they are part of a course of instruction to acquire or improve job skills. The Lifetime Learning credit is equal to 20 percent of the first $10,000 of your qualified tuition and related expenses, up to a maximum credit of $2,000 per tax return.

    The maximum American Opportunity tax credit is available to single filers with a MAGI below $80,000 and to joint filers with a MAGI below $160,000. A partial credit is available to single filers with a MAGI between $80,000 and $90,000 and to joint filers with a MAGI between $160,000 and $180,000. For 2016, the maximum Lifetime Learning tax credit is available to single filers with a MAGI below $55,000 and to joint filers with a MAGI below $110,000. A partial credit is available to single filers with a MAGI between $55,000 and $65,000 and to joint filers with a MAGI between $110,000 and $130,000. These credits are not available to you if your filing status is married filing separately.

    Be aware that you cannot claim both credits for the same student in the same year. For additional information, see IRS Publication 970 or consult a tax professional.

    What is the child tax credit?

    The child tax credit is a per-child tax credit against your personal income tax liability. The child tax credit is $1,000 per child.

    If you have a qualifying child under the age of 17, you may be entitled to claim this credit. A qualifying child may be a dependent child, stepchild, adopted child, sibling, or stepsibling (or descendant of these individuals), or an eligible foster child. The child must be a U.S. citizen or resident and must live with you for over half the year.

    The child tax credit begins to phase out if your modified adjusted gross income (MAGI) exceeds a certain level ($110,000 for married persons filing jointly, $55,000 for married persons filing separately, and $75,000 for heads of household, widow(er)s, and single persons). The credit is reduced by $50 for each $1,000 that your MAGI exceeds the above amounts. To claim the child tax credit, you must file either federal Form 1040 or 1040A.

    The credit is refundable, so you may be able to obtain a refund even if the credit exceeds your regular or alternative minimum tax (AMT) liability. Currently, the credit is refundable to the extent of 15 percent of your earned income in excess of $3,000, up to the per-child credit amount. Special rules may apply if you have three or more qualifying children and are eligible for the earned income credit (EIC).

    What is the difference between the child tax credit and the child and dependent care tax credit?

    These credits are quite different. First, the child tax credit. The purpose of this credit is simply to provide tax relief for parents, working or not, who have qualifying children under the age of 17. A qualifying child may be a dependent child, stepchild, adopted child, sibling, or stepsibling (or descendant of these individuals), or an eligible foster child. The child must be a U.S. citizen or resident and must live with you for over half the year.

    If you’re eligible, you may be able to take a credit on your federal income tax return of up to $1,000 per child. The child tax credit begins to phase out if your modified adjusted gross income (MAGI) exceeds a certain level.

    The other credit–the child and dependent care tax credit–offers relief to working people who must pay someone to care for their children or other dependents. You may qualify for a tax credit equal to 20 to 35 percent of expenses incurred when someone cares for your dependent child (under age 13), your disabled spouse, or your disabled dependent so that you (and your spouse, if married) may work or look for work. The work-related expenses you can use when figuring the credit are limited to $3,000 for one qualifying individual, and $6,000 for more than one qualifying individual.

    For married persons to qualify for the credit, both spouses must work outside the home, or one must work outside the home while the other is a full-time student, is disabled, or is looking for work (provided that the spouse looking for work has earnings during the year). Married couples must also file a joint income tax return. The credit is also available if you’re a single parent or a divorced custodial parent.

    For more information, consult a tax professional.

    What is the earned income credit and who qualifies for it?

    The earned income credit (EIC) is a refundable tax credit available to certain low-income individuals who have earned income, meet adjusted gross income thresholds, and do not have more than a specified amount of disqualified income (excess investment income). If you file a federal tax return and meet all applicable requirements, your income tax (if any) will be reduced and you might receive a refund.

    To qualify for the EIC, you must meet all of the following requirements:

    Must have earned income
    Tax return must cover a full 12 months (unless a short period is filed due to taxpayer’s death)
    Filing status cannot be married filing separately
    Cannot be a qualifying child of another taxpayer
    Must not have filed forms related to foreign earned income
    Must have no more than $3,400 of disqualified income (2016)
    In addition, special rules will apply to taxpayers who have qualifying children and to taxpayers who do not have qualifying children.

    For more information, consult a tax professional.