Although a person may qualify to claim a tax credit, these tax preference items (1) have at least one qualifier, (2) are generally based on your income, and (3) have a minimum and maximum amount rather than a guaranteed amount that you will be allowed in a given tax year.  Some individuals qualify for the maximum and others qualify for an amount in between the minimum and the maximum.  A combination of these factors determine which tax credit you are entitled to claim and how much your refund may be.  Some common tax credits for individuals include, education, child tax, dependent care, retirement savings, and earned income tax credit.

Education Credits

An education credit is a tax credit available for some of the costs paid for higher education.  There are two education credits available for to individuals on their annual tax return, the American Opportunity Tax Credit (AOTC) and Lifetime Learning Tax Credit (LLTC).  The qualifier is you must pay certain educational expenses for yourself, your spouse, or other qualifying student to an eligible educational institution.

The AOTC is available for some of the costs paid for some student first four years of higher education. The maximum credit is $2,500 per student.  If the maximum credit reduces your tax to zero, up to 40% of the credit remaining will be included as part of your refund.  To claim the AOTC, the student must:

• be pursing a degree or other recognized education credential;
• be enrolled at least half-time for at least one academic period;
• not have finished the first four years of higher education at the beginning of the tax year;
• not have claimed the AOTC for more than four (4) years;
• not be a convicted drug felon; and
• received Form 1098-T, Tuition Statement from the educational institution

The LLTC is a credit that reduces tax by the amount of the credit you are eligible to take.  The credit is available for tuition paid for undergraduate, graduate and professional degree courses taken to improve job skills.  The maximum credit is $2,000 per return and if the credit is more than the amount of the tax the difference will not be included in your refund. To claim the LLTC, you must:

• pay for qualified education expenses for yourself or someone you are claiming on your return;
• take education courses to get a degree or improve job skills;
• be enrolled at least one academic period; and
• receive For, 1098-T, Tuition Statement

Qualified education expenses must be reduced by scholarships, fellowships and other assistance provided to the student to pay for such expenses.  Qualified education expenses does not include room and board, travel, research, equipment and other expenses not required for enrollment.  Qualified education expenses does include:

• tuition and fees required to enroll at or attend an eligible educational institution;
• course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible institution.

Only one credit can be claimed for each eligible student.  If there are two students, a different credit can be claimed for each student.  Neither education credit can be claimed if a student is claimed as a dependent on another person’s tax return; for individuals whose filing status is married filing separate; nonresident aliens; bona fide residents of Puerto Rico, and if modified adjusted gross income exceeds a certain amount.

Both credits are computed based on no more than $4,000 in educational expenses, regardless if more was paid.  Each educational institution should provide Form 1098-T by January 31, of the following year to show the tuition amount, scholarships, and other information needed to compute the credit.

See Form 8863, Education Credits to compute either or both credits.

Child Tax Credit 

The child tax credit is a nonrefundable credit which is used to reduce an individual’s tax liability.  Nonrefundable means that if the “taxable income” line on form 1040 is zero (0) or a negative number because your filing status is greater than your income, you will not receive the credit (but can see if you qualify for the additional child tax credit).  The rules for claiming the credit may be different for different years, so check the rule against the year you are seeking to claim the credit for.

The child tax credit is available to individuals who have at least one child between ages 0 – 16; the child has a social security number before the due date of the return; the person claiming the child has a valid taxpayer identification number such as a SSN; and certain income limits are met.

You can determine your qualification for the child tax credit by reviewing the 1040 Individual Income Tax Instruction Booklet and Publication 17.

Use the Worksheet in Pub. 972, Child Tax Credit and Credit for Other Dependents to compute the amount of your child tax credit.

Additional Child Tax Credit

The additional child tax credit is available to individuals who qualified for the child tax credit but only received a portion of the credit.  The additional child tax credit is a refundable credit which means that the amount of the credit will be received even if an individual has a zero tax liability.

Schedule 8812, Additional Child Tax Credit is used to compute the credit.

Child and Dependent Care Credit

To claim the child and dependent care credit, an individual must have paid for day-care (or similar service) for a dependent child under age 13 in order to work or look for work. The credit is available for qualifying child care expenses of up to $3,000 paid for one dependent and up to $6,000 paid for two or more dependents.  The credit is available for an individual’s spouse who lived with the spouse for more than half the year and who was physically or mentally unable to care for his/herself.  The credit is also available for other dependents who were physically or mentally unable to care for him/herself and who is being claimed as a dependent.

The care givers tax id number and address are needed to complete Form 2441, Child and Dependent Care.  If the form is not attached or filled out correctly, the credit may not be allowed.

To learn more about the credit, see the 1040 Instruction Booklet, Pub. 17, and Pub. 503, Child and Dependent Care Expenses.

Credit for Other Dependents

Is a $500 nonrefundable credit available to individuals who have one or more dependent who are not a qualifying child for purposes of claiming the child tax credit.  This credit can be claimed by: persons who claim a dependent on their return; the child tax credit nor additional child tax credit was claimed for the dependent; the dependent has a valid social security number (SSN), tax identification number (TIN), or adoption tax identification number (ATIN); and the person claiming the dependent has a valid tax identification number (TIN).

For information on this credit, see the Instruction Booklet for Form 1040 and Publication 972, Child Tax Credit and Credit for Other Dependents.

To claim the credit, check the box for “credit for other dependents” on page 1 of Form 1040.

Earned Income Tax Credit

The EITC is a refundable credit which means so long as you have earned income you will receive the credit even if you have zero taxable income which results in zero tax.  An individual must have “earned income” for the year you are looking to claim the credit. Common types of earned income includes:

• taxable wages, salaries – received as an employee
• net earnings from self-employment – entrepreneur, sole proprietor,
• nonemployee compensation – independent contractors
• taxable long-term disability benefits received prior to minimum retirement age

Common types of income that is not considered earned income for purposes of claiming the EITC include:

• unemployment compensation
• pensions and annuities (unless the person receives a disability pension and is under the minimum retirement age)
• interest and dividends
• social security and railroad retirement benefits
• workers’ compensation benefits
• alimony or child support
• nontaxable foster-care payments
• welfare benefits
• taxable scholarship/fellowship grants that aren’t reported on Form W-2

The range of the EITC changes from year to year and is based on one’s income, filing status, number of qualifying individuals. A qualifying individual can be the taxpayer or other individual.  Individuals between the age of 25 and 64 can claim the credit for themselves.  Other qualifying individuals include a child that meets the relationship, age, and residency test.

Generally, the higher your earned income the less, of the maximum credit you will qualify for; the lower your income the lower your credit is likely to be; and individuals whose income is between the maximum income limit and minimum income limit the larger your credit will be.  In most cases, earned income is reflected on Information Returns such as Form W-2 and 1099-MISC.  The following requirements must be met in order to claim the EITC:

• SSN for individual(s) claiming the credit
• SSN for individuals the credit is being claimed for
• Must be a U.S. citizen or resident alien for the entire year the credit is being claimed for
• Investment income cannot exceed a certain amount

Resources that can be reviewed for more information on understanding, claiming, and computing the EITC:

• 1040 Instruction Booklet
• Pub. 17, Your Federal Income Taxes
• Pub. 5334, Do I Qualify for the EITC
• Pub. 596, Earned Income Credit – how to compute your credit

Retirement Savings Contribution Credit

The retirement savings contribution credit is available to individuals who make eligible contributions to an individual retirement account or employer-sponsored retirement plan.  Contributions can be made to a traditional or Roth IRA; 401(k), 403(b), 457(b); SARSEP or SIMPLE plan; Able account; or federal thrift savings plan.  To be eligible, the individual must:

• be 18 years of age or older;
• not claimed as a dependent on someone else’s return, and
• not a student.

Student means an individual who during any part of five months of the tax year was enrolled as a full-time student at a school or took a full-time or farming training course given by a school, county or local government agency.  School includes technical, trade, and mechanical schools.

Resources for more information on qualification for and computation of the Retirement Savings Contributions Credit include:

• Form 880, Credit for Qualified Retirement Savings Contributions
• Pub. 590-A, Contributions to Individual Retirement Arrangements
• Pub. 590-B, Distributions from Individual Retirement Arrangements