Tax season can be a tough time for people who find that they owe large amounts of money to the IRS. However, taxpayers often shell out more than they should during tax season when they fail to take advantage of all the tax credits that are available.
The tax code establishes an enormous range of laws that are only applicable in certain cases, so even tax attorneys struggle to make sense of all the tax-saving opportunities individuals can claim. Taking advantage of every tax credit the law allows can leave you with a big refund that will improve your financial situation.
Establishing a 401(k) or IRA is a crucial step toward a secure financial future in retirement. Employers often match retirement contributions, so almost everyone who works chooses to establish a tax-advantaged retirement account. You may not have realized, however, that the tax code can reward you with a significant credit for setting money aside for retirement.
According to a survey by the Transamerica Center for Retirement Studies, just 12 percent of people who qualify for the Savers Credit claim it on their tax returns. The Savers Credit can give you up to $2,000 to offset the cost of the sacrifice you make by saving for your future.
You can claim the Savers Credit as long as you have a moderate income and save enough money to qualify. The credit lets you claim up to 50 percent of the amount you set aside for retirement each year if you are a single filer making less than $18,500 or a joint filer making less than $37,000. At higher income levels, 10 percent of annual contributions can be claimed by single filers who bring in less than $31,000 and joint filers who earn less than $62,000.
In order to qualify for the Savers Credit, you have to file your taxes using one the following forms: 1040, 1040A, or 1040NR.
Lifetime Learning Credit
Students often struggle to pay for their college expenses, but they almost always neglect to claim the Lifetime Learning Credit (LLC) during tax season. The LLC can reimburse you for up to 20 percent of what you spend on books, courses, and other expenses related to your education. You can also claim the LLC if you are paying money to pursue online classes, certifications, or private studies outside of an accredited institution. Overall, you can receive up to $2,000 each year when you claim the LLC on your tax return.
The LLC is similar to the American Opportunity tax credit that most students know to claim, but it is much more flexible than its well-known counterpart. You can only claim the American Opportunity tax credit for a total of four years, but the LLC can be claimed for an unlimited number of years. Although enrollment in a post-secondary institution is a prerequisite for claiming the LLC, you can deduct any qualifying educational expenses when you are enrolled. The LLC does not limit deductions to expenses related to your educational institution, and it does not require that students work toward a degree.
Foreign Tax Credit
The Internet has brought the world closer together than ever before, and it has enabled many people to do their work from any location around the world. A growing number of U.S. citizens are choosing to reside in affordable countries for extended periods of time to pursue unique job opportunities and experience new cultures. The Foreign Tax Credit reimburses you for unlimited amounts of money that you pay in taxes to foreign governments when you are living overseas.
You are, however, subject to several important limitations when you take advantage of the Foreign Tax Credit. The value of the credit cannot exceed the amount you pay in taxes to the federal government in any calendar year. If you reside in a country that imposes higher tax rates than the U.S. government, the Foreign Tax Credit does not cover any amounts that exceed what you pay to the IRS. You also cannot claim any tax payments that you could have avoided or sums that will be reimbursed at any point in time.
U.S. citizens who fear double taxation almost never consider long-term stays in foreign countries, but the little-known truth is that the Foreign Tax Credit offers broad protection from double taxation.
Premium Tax Credit
Misunderstandings about the Affordable Care Act (ACA) are still widespread. Studies have shown that the majority of people who are entitled to benefits under the ACA are, in general, not taking advantage of everything they can claim. The Premium Tax Credit (PTC) can help to pay the cost of your insurance plan if you have a moderate-income level. To qualify for the PTC, you have to make less than 400 percent of the federal poverty level. You also cannot claim the PTC if you qualify for Medicaid.
One of the unique aspects of the PTC is that you can claim it before the end of a tax year. The PTC gives you a subsidy as soon as you buy health insurance under the ACA, but you must claim it as a credit on your tax return. The amount of money that the PTC gives you varies widely based on a complex formula, but the bottom line is that single individuals making less than $48,240 and couples bringing in less than $98,400 qualify for the tax credit in most cases.
If you are not aware of the PTC, make sure that you investigate it for a chance to save thousands of dollars on your taxes.