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A Comprehensive Guide to 2023 Tax Credits

Tax Credits

Every year, people’s lives change in ways that affect their taxes. They may start a higher education program or have a child, and others take on elderly parents as dependents. These situations can change their eligibility for tax credits. In addition, federal, state and local governments sometimes adjust rules about credits, so it is crucial to understand what credits you can take. Navigating the world of tax credits and deductions can be confusing. That is why a trusted financial advisor can help you find every tax credit that you’re entitled to. Here’s a roundup of common tax credits that you could be eligible for in 2023.

Tax Credits Available for the 2022 Tax Year

The first thing to be aware of is that some federal tax credits may be changed in 2022 if President Biden’s Build Back Better Act, or some of it, becomes law. Despite efforts to pass the bill in 2021, Congress was not successful.

As 2021 came to an end, federal lawmakers were resigned to having to take it up in 2022. So, absent Congressional action, 2022 tax credits that were temporarily enhanced for 2021 by the American Rescue Plan will lapse, meaning relevant tax credits will revert to what they were in 2020.

Other federal tax credits will remain the same or change for reasons that have nothing to do with the fate of Build Back Better.

What Is a Tax Credit?

Tax credits lowers the amount of money you must pay the government. It is designed to encourage people to spend money in specific ways. For example, one of the most common tax credits is the Child Tax Credit. Taxpayers who have children under the age 16 at the end of the calendar year receive a credit to help reduce the cost of raising a child. Another popular tax credit is the Lifetime Learning Credit (LLC). The LLC encourages people to pursue further education by crediting part of the overall cost back at tax time.

A tax deduction lowers one’s taxable income, thus reducing the tax liability. If a person receives a deduction, he decreases the amount from his income, which lowers his taxable income. The lower a person’s taxable income, the lower the tax bill.

By contrast, a tax credit decreases the tax bill rather than a person’s taxable income. So, if a person has a $100,000 salary and has a $10,000 deduction, the taxable income will be $90,000. If the person in this example is taxed at a rate of 25%, the tax bill will be $22,500. If that same person has a $10,000 credit instead of a deduction, he will be taxed at 25% of their $100,000 income and owe $25,000 in taxes. However, he will then be credited $10,000 and owe only $15,000.

Some tax credits are refundable, but most are not. A refundable tax credit, which is different from a tax refund, can be given to taxpayers even if they do not owe any taxes. Additionally, a refundable tax credit can be given in addition to a tax refund.

A nonrefundable tax credit means that a person will get the tax credit up to the amount owed. For example, if a person owes $2,000 in taxes and receives $3,000 in nonrefundable credits, that will simply erase her tax bill. If she gets $3,000 in refundable credits, she will receive a $1,000 tax refund.

Some common tax credits for individuals include:

  • Child Tax Credit
  • Earned Income Tax Credit
  • Credit for Other Dependents
  • Adoption Credit
  • Low-Income Housing Credit
  • Premium Tax Credit (Affordable Care Act)
  • American Opportunity Credit
  • Lifetime Learning Credit

Child Tax Credit

The Child Tax Credit was expanded for one year in March 2021 by the American Rescue Plan, providing $3,600 per qualifying child age 5 or younger and $3,000 per qualifying child ages 6 to 17.

For someone to be eligible for this credit, the modified adjusted gross income (AGI) must be under $400,000 if the parents of the children file jointly and $200,000 for any other person filing. Joint filers of 2021 taxes can claim the full credit with an AGI beneath $150,000, under $75,000 for single filers and less than $112,500 for heads of household.

Absent Congressional action, the Child Tax Credit, which is not adjusted for inflation, in the 2023 tax year the CTC will be: a credit of up to $2,000 per child under age 17. The refundable portion of this credit is adjusted for inflation and rises to $1,540 from $1,500.

Additional requirements to qualify for the child tax credit include that the person filing must have provided at least half of the child’s support in the calendar year, and the child must have lived with the person filing for at least half the year. There are some exceptions to this rule, and it is best to discuss the child tax credit with a tax advisor.

Child and Dependent Care Credit

The cost of childcare, eldercare and other in-home care in the U.S. is high and tends to rise each year. If a couple is married and files jointly and has paid expenses for the care of a qualifying child or dependent so that one or both can work, they are likely eligible for the Child and Dependent Care Credit, which is designed to help individuals who need to hire a caretaker to stay in the workplace.

For 2021, the American Rescue Plan increased the Child and Dependent Care Credit to $4,000 for one qualifying person and $8,000 for two or more qualifying persons and potentially refundable, so you might not have to owe taxes to claim the credit, so long as you meet the other requirements. However, taxpayers with an adjusted gross income over $438,000 are not eligible for this credit even though they may have previously been able to claim this credit.

For 2023, unless Congress acts, the most care expenses you may claim is $3,000 for one person or $6,000 for two or more people. The credit, which is non-refundable, is a percentage of work-related expenses paid to a care provider and depends on your AGI. It ranges from a high of 35% to a low of 20%.

There are several qualifiers on the person being cared for. A child must be under age 13 when the care was provided. A qualifying spouse must be unable to take care of himself and have lived in the taxpayer’s home for at least half the year. A qualifying dependent must be physically or mentally incapable of caring for himself, have lived with the taxpayer for at least half the year and is either a dependent or could have been a dependent of the taxpayer.

There are limits on who can provide care to qualify for this tax credit. The caregiver must not have been the taxpayer’s spouse, a parent of the child being cared for or anyone else listed as a dependent on the tax return. Additionally, the caregiver can’t be a child of the taxpayer.

Any child support payments you’ve received won’t be counted as taxable income. And if you’re the one making the child support payments, the income you used to do so won’t be tax deductible.

Federal Adoption Credit

Families that grow through adoption might be eligible for the Federal Adoption Tax Credit. Adoption can be an expensive process, and as families take on the burden of legal fees and more, the Federal Adoption Credit can help to decrease the burden when filing taxes.

For the 2023 tax year, the maximum amount for this credit is $15,950. That’s up from the 2022 level of $14,890. The credit begins to phase out for taxpayers with modified AGI above $239,230, and it’s completely phased out once a filer’s income reaches $279,230.

This credit is not refundable, meaning that taxpayers can only use this credit if they have a federal tax liability for 2023.

An eligible child is any person under the age of 18 that is mentally or physically unable to take care of themselves. Eligible expenses include court costs, attorney fees, home studies and other travel expenses related to the adoption. The Federal Adoption credit is nonrefundable, so it will not produce a refund.

There are several rules for the Federal Adoption Credit, so it is important to speak with your tax advisor before claiming this credit. For example, if you received employer-provided adoption benefits, you may not claim the same expenses that were covered by your employer for the Federal Adoption Credit.

Credit for Other Dependents

Tax Credits

The Credit for Other Dependents is a tax credit that was part of the 2017 Tax Cuts and Jobs Act and is in effect through 2025. This credit, which was not enhanced by the American Rescue Plan, is available for taxpayers who do not qualify for the Child Tax Credit.

For example, someone who has a child age 17 or older or has other adult dependents with an individual taxpayer identification number might qualify for this credit. This tax credit amount is $500 for each dependent that qualifies for the tax credit. The credit is available in full to a taxpayer who earns $200,000 or less and decreases on a sliding scale as that person’s income increases.

An example of someone eligible for the Credit for Other Dependents is a single person filing who has a child dependent that is 17 years old and another child who is 21 and in college. Both children would likely qualify as dependents, and each would be eligible for the $500 credit. Another example is if someone has an adult relative living with him listed as a dependent on his tax return. In any case, the dependent must be a U.S. citizen, national or resident alien.

Lifetime Learning Credit

To promote education in the United States, the IRS created a tax credit called the Lifetime Learning Credit (LLC). This credit is for qualified tuition and expenses paid for qualified students at qualified institutions in the United States.

To claim the LLC, a person, their spouse or their dependent must pay qualified higher education expenses. Additionally, the student must be enrolled at an eligible educational institution. Eligible educational institutions are colleges, technical schools and universities offering education beyond high school. All qualified educational institutions are eligible to participate in a student aid program run by the U.S. Department of Education. The IRS publishes a list for people to search if their school is a qualified educational institution.

The LLC has income limits for the 2023 tax year. To qualify for the full credit a taxpayer’s income must be no more than $80,000 for single filers or $160,000 for joint filers. Beyond those limits, the credit phases out.

To get the LLC, a person must have received a 1098-T tuition statement from the higher education institution. The credit is worth 20% of the first $10,000 that a person spends at a higher education institution. For example, if a person started school at a university in the fall semester and tuition cost $10,000 or more, that person would receive a credit of $2,000. The LLC is not refundable, so a person can use the credit for taxes but will not receive the credit as a refund.

The Retirement Contribution Savings Credit

The Saver’s Credit, or the Retirement Contribution Savings Credit, has been around since the early 2000s. It was created to help low- and moderate-income individuals save for retirement. The 2023 credit is somewhat higher than the 2022 credit.

For the 2023 tax year, the Saver’s Credit is worth 10%, 20% or 50% of a filer’s total savings contribution, depending on the filer’s income. The maximum contribution amount that may qualify for the credit is $2,000 ($4,000 if married filing jointly), making the maximum credit $1,000 ($2,000 if married filing jointly).

This credit is not available for one’s 2023 tax returns if your AGI is above $73,000 for a married joint filer, $54,750 for a head of household filer or $36,500 for every other filing status.

Earned Income Tax Credit

An Earned Income Tax Credit (EITC) reduces the tax bills for low- to moderate-income working families. For the 2023 tax year, the EITC is $600 for no children, $3,995 for one child, $6,604 for two children and $7,430 for three or more children. Also, the EITC is not allowed if the aggregate amount of investment income exceeds $11,000.

For the 2021 tax year, the credit ranges from $1,502 for single persons or married couples with no children to a maximum of $6,728 for single persons or married couples with three or more children. This amount changes every year, so be sure to verify the EITC with a tax advisor or verify with the IRS.

Besides filing status and number of children, income is also a factor in determining how much of the EITC one gets. To earn the maximum EITC, a single filer can earn $56,838 or less, and a joint filer can earn $63,398 or less and have three or more dependent children.

To qualify for the EITC, a taxpayer must have earned taxable income from a company, running a farm or owning a small business. People who do not earn an income, are married and filing separately or do not have a Social Security number are not eligible for this credit. Additionally, people who earned over $10,000 in investment income are ineligible for this tax credit.

American Opportunity Tax Credit

The American Opportunity Tax Credit (AOTC) is available to eligible students in the first four years of higher education. Students must be pursuing a degree or other recognized credential, be enrolled at least half-time for at least one academic period or semester, not have received the AOTC or the Hope credit for more than the past four years and not have a felony drug conviction at the end of the tax year.

For the 2023 tax year, students may receive up to $2,500 of credit for the AOTC. The credit is refundable up to 40%, so if a student is eligible for the full $2,500 and receives a tax return, the student can receive up to $1,000. The credit is awarded for 100% of the first $2,000 of qualified educational expenses and 25% of the next $2,000 of educational expenses. Therefore, if a student pays at least $4,000 in educational expenses, he will receive the full $2,500.

To prove they are eligible, students must receive a 1098-T from their educational institution. A taxpayer’s modified adjusted gross income (MAGI) must be $80,000 or less, or $160,000 or less for a married couple filing jointly to receive the full AOTC. If the student is a dependent, the taxpayer may claim the AOTC when filing taxes.

An example of someone claiming the AOTC is a parent who earns $79,900 and has a student in the first four years of a degree program. Another example of someone eligible is a student who is not a dependent of anyone and works part-time, earning $80,000 or less.

You should note that taxpayers can get a reduced amount of the credit if their MAGI is higher than $80,000 but less than $90,000 (between $160,000 and $180,000 for joint filers). If you are unsure if you or your family qualifies for this tax credit, be sure to speak with a tax advisor.

The Bottom Line

Tax Credits

There are many tax credits that American taxpayers can take advantage of. These credits were created to encourage spending in specific areas of the economy and help low- and moderate-income families prosper. In addition to tax credits, there are plenty of other ways to keep more money in your pocket during tax season. Be sure to check out the IRS website to learn more about other tax credits, including the Residential Energy Efficient Property Credit, Foreign Tax Credit and more.

Tips on Taxes

  • A financial advisor can help you with tax planning and preparing in advance for potential credits. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Use SmartAsset’s free tax calculator to get a feel for what your tax bill could be this year.

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