2017 Federal Income Tax Planning

Tax Credits

What is a tax credit?

A tax credit results in a dollar-for-dollar reduction of your tax liability. After you calculate the amount of tax for which you are liable, based on your taxable income, you subtract the total amount of any tax credits for which you are eligible. In some cases, if your tax credits exceed your tax liability, you will be able to claim the difference as a refund.

What's the difference between a tax deduction and a tax credit?

A tax deduction reduces your taxable income. Because your federal income tax is based on your taxable income, a tax deduction will decrease the amount of tax owed. The extent to which a deduction reduces tax, though, depends on your marginal federal income tax bracket. The higher the rate at which you're paying tax, the more a tax deduction reduces your tax liability. Here's an example: If you're in the 28% marginal tax bracket and have $1,000 in tax deductions, your tax liability will be reduced by $280. That same $1,000 tax deduction would result in a $350 reduction in tax liability if you are in the 35% marginal tax bracket.

A tax credit, on the other hand, is a dollar-for-dollar reduction. A tax credit of $1,000 will reduce your tax liability by $1,000, regardless of your tax bracket.

Refundable vs. nonrefundable tax credits

Most tax credits are nonrefundable. That means a tax credit can reduce your tax liability to zero. If there's any credit remaining after offsetting all tax liability, it is generally lost, or in some cases carried over to other years.

Credits that are refundable are paid to you even if there is credit left over after reducing your tax liability to zero.

Common tax credits for individuals

Tax Credits That Are Refundable or Partially Refundable

Earned income tax credit	This is a credit for certain lower- and moderate-income people who work. The amount of the credit is based on your adjusted gross income (AGI), your filing status, and the number of qualifying children you have (if any). The maximum earned income tax credit for 2017 is $6,318, which applies to taxpayers with 3 or more qualifying children, and AGI below $23,930 (married filing jointly) or $18,340 (other qualifying filing statuses).
Child tax credit	A credit of $1,000 for each qualifying child you claim on your return. The credit is limited if your modified AGI is above a certain amount ($75,000 if filing status single, $110,000 if married filing jointly, $55,000 if married filing separately). Up to 15% of earned income in excess of $3,000 is refundable.
American Opportunity Tax Credit*	A credit of up to $2,500 for qualified tuition and related expenses paid for each eligible student. This credit is available for the first four years of post-secondary education. An eligible student must be enrolled at least half-time for at least one academic period during the year, and can have no felony drug conviction on his or her record. The credit phases out at higher incomes (modified AGI between $80,000 and $90,000 for single filers, $160,000 and $180,000 for married filing jointly). Up to 40% of the credit is refundable.

Nonrefundable Tax Credits

Adoption tax credit	A tax credit of up to $13,570 in 2017 for qualifying expenses paid to adopt an eligible child. The credit is not available for any reimbursed expense. The credit is phased out for those with modified AGI between $203,540 and $243,540.
Child and dependent care credit	This credit is available if you paid someone to care for a qualifying individual so you (and your spouse if you are married) could work or look for work. The credit amount is a percentage (maximum 35%) of the work-related child and dependent care expenses you paid to a care provider, and it is based on your AGI. You may use up to $3,000 of the expenses paid in a year for one qualifying individual, or $6,000 for two or more qualifying individuals. These dollar limits must be reduced by the amount of any dependent care benefits provided by your employer that you exclude from your income.
Credit for the elderly or the disabled	You may be able to take the credit for the elderly or the disabled if: (1) you're age 65 or older and meet certain income requirements, or (2) you're under age 65, retired on permanent total disability, and received taxable disability income during the year.
Foreign tax credit	This credit is intended to reduce the double tax burden that would otherwise arise when foreign-source income is taxed by both the United States and the foreign country from which the income is derived. Qualified foreign taxes do not include taxes that are refundable to you or taxes paid to countries whose government is not recognized by the United States. You can choose to take the amount of any qualified foreign taxes paid or accrued during the year as a foreign tax credit or as an itemized deduction on Schedule A of Form 1040.
Credit for contributions to retirement plans and IRAs ("saver's" credit)	If you make eligible contributions to an employer-sponsored retirement plan or to an IRA, you may be able to take a tax credit. The amount of the available saver's credit is based on the contributions you make (up to $2,000), your credit rate, and your AGI. If you qualify for the credit, your credit rate can be as low as 10% or as high as 50%, depending on your AGI and filing status. The maximum credit is $1,000 per individual.
Lifetime Learning credit*	A credit of up to $2,000 — 20% of up to $10,000 in tuition paid for all students enrolled in eligible educational institutions. There is no limit on the number of years for which this credit can be claimed. The student does not need to be pursuing a degree or other recognized educational credentials. The credit is available for one or more courses. The credit phases out at higher incomes (for 2017, modified AGI between $56,000 and $66,000 for single filers, $112,000 and $132,000 for married filing jointly).

*You can't take both the American Opportunity credit and the Lifetime Learning credit in the same year for the same student.