|2017 Federal Income Tax Planning
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
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
|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
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
|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.
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|Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2020.