The best part about tax season for many taxpayers is receiving a refund. Aside from excess withholding, most taxpayers are not aware of what makes up their refund or for some not having to payout as much in taxes.
Though there are several credits that one can claim, there are four main tax credits that are major contributors to the refund a taxpayer may receive. These include, Child Tax Credit (CTC), Earned Income Tax Credit (EITC or EIC), Credit for Other Dependent (ODC), and Child and Dependent Care Credit. Claiming either one of these credits can increase a taxpayer’s refund or reduce their tax liability considerably.
Let’s explore what each of these credits are and the basis on which they can be claimed.
The Child Tax Credit (CTC) is a partial refundable credit. To claim the CTC the taxpayer must meet certain qualifications. These include:
The child must be under the age of 17 years old
The taxpayer must have provided more than half of the child’s wellbeing. (i.e. shelter, food, clothing).
The child must be a relative (i.e. daughter, niece, grandson, etc.)
The child must possess an active SSN and have lived in the U.S. for more than half of the year
*This credit allows the taxpayer to claim up to $2,000 per qualifying child of which $1,400 is refundable and the remaining $600 is nonrefundable. If you are single and your income exceeds $200,000 then the credit begins to phase out, whereas, if you are married filing joint the phaseout starts at $400,000.
Credit for Other Dependent (ODC) is a nonrefundable credit that works to offset taxes owed.
This credit is claimed by taxpayers who are not eligible to claim the CTC. What causes this difference is the age of the dependent being claimed. For example, if the dependent being claimed is 17 years old you will not be eligible to claim the CTC, therefore, this would be the next possible credit.
The dependent being claimed however, must not have earned more than $4,200 throughout tax year 2019.
Each dependent claimed on the tax return awards the taxpayer with a $500 nonrefundable tax credit. The dependent also does not have to be a relative to be awarded this credit.
Earned Income Tax Credit (EITC or EIC) is a fully refundable credit that is made available to lower -moderate income taxpayers. This credit is governed by the income earned by the taxpayer(s) (including not having investment income of more than $3,600 for tax year 2019), as well as the amount of dependent being claimed on their tax return. The chart below displays eligibility:
Once the taxpayer’s income begins to exceed the listed amount the credit then begins to phase out. The maximum amount of credit for Tax Year 2019 is:
$6,557 with three or more qualifying children
$5,828 with two qualifying children
$3,526 with one qualifying child
$529 with no qualifying children
Child & Dependent Care Credit is a nonrefundable credit that allows taxpayers to deduct a portion of the expenses paid for their child or other dependent care expenses. For example, daycare or home care service. Requirements for claiming this credit are:
The child being claimed must be under the age of 13. If the dependent is over 13 years old, they would have had to been disabled.
The taxpayer claiming this credit would have had to been seeking work or working to be eligible.
The filing status of the taxpayer cannot be married filing separate (MFS). If married filing joint (MFJ) both taxpayers would have had to had earned income during the year.
The dependent must have lived with the taxpayer for more than half of 2019
The credit amount awarded in this case is based on a percentage of 20-35% of the amount of expenses paid for that individual. For one child the maximum amount of expenses assessed would be $3,000, or if two or more children that maximum would then be $6,000. However, the percentage decrease based on the adjusted gross income of the taxpayer until it reaches 20%.
There are several credits that can be claimed by a taxpayer, which can be either fully refundable, partially refundable, or nonrefundable. However, to claim any tax credit issued by the IRS, the taxpayer must be eligible; which means they would need to be able to substantiate all the claims that are reflected on their tax return.
If the IRS deems that the taxpayer unlawfully abused claiming these credits, there are serious penalties in place that will outweigh the benefit of wrongfully claiming the credit for one year. One penalty includes the taxpayer not being able to claim the credit that was wrongfully claimed for 2-10 years.