3 Refundable Tax Credits You Should Know About This Year

Want money back from the IRS? Don't forget these lucrative sources.

Maurie Backman
Maurie Backman
Mar 10, 2019 at 9:48AM
Investment Planning

We all want to pay as little tax as possible to the IRS, and a good way to keep your bill on the lower side is to take advantage of the tax credits that are available to you. A tax credit is a dollar-for-dollar reduction of your tax liability. It's different from a tax deduction, which merely exempts a portion of your income from taxes.

Here's how the difference might play out. If you get a deduction worth $2,000, you don't pay taxes on that much of your income. Assuming a tax rate of 25%, that's $500 in tax savings. A $2,000 tax credit, on the other hand, will directly shave a full $2,000 off of your taxes, regardless of what your tax rate is.

Now most tax credits aren't refundable, which means the most they can do is reduce your tax liability to $0. A few credits, however, are refundable, which means that if your tax liability is knocked down below $0, the IRS will send you the difference. Here are a few refundable tax credits it pays to see if you're eligible for.

Man counting hundred-dollar bills

IMAGE SOURCE: GETTY IMAGES.

1. The Earned Income Tax Credit

The Earned Income Credit, or EITC, is designed to help low-income households, and it could be worth up to $6,431 for the 2018 tax year (which is the tax year you're filing for this year). Eligibility for the credit depends on your income level coupled with the number of qualifying children you have in your household. To be eligible for the EITC, your tax filing status can't be married filing separately, and you can't have investment income that exceeds $3,500. You can claim the EITC if your income doesn't exceed the following limits:

Tax Filing Status

No Qualifying Children

1 Qualifying Child

2 Qualifying Children

3 or More Qualifying Children

Single, head of household, or widowed

$15,270

$40,320

$45,802

$49,194

Married filing jointly

$20,950

$46,010

$51,492

$54,884

DATA SOURCE: IRS.

If you meet these criteria and have no qualifying children, the credit is worth $519. If you have three children or more, it's worth the maximum $6,431. And since the credit is fully refundable, whatever amount it gives you is money in your pocket if you otherwise owe no tax.

2. The Child Tax Credit

If you have children under the age of 17 in your household, you might qualify for the Child Tax Credit -- even if you've historically been denied that credit because your income was too high. Prior to the 2018 tax year, the Child Tax Credit began to phase out at an income level of $75,000 for single tax filers, and $110,000 for married couples filing jointly. These thresholds have since increased to $200,000 and $400,000, respectively, which means you might get to claim the credit on your 2018 tax return. The Child Tax Credit is worth up to $2,000 per child, of which $1,400 per child is refundable.

3. The American Opportunity Tax Credit

The American Opportunity Tax Credit is designed to help low to middle earners pay for higher education. The credit, which is calculated as a percentage of your education expenses up to a certain amount, is worth up to $2,500, and up to $1,000 of that is refundable.

To qualify, you must be enrolled in studies at least half-time, and the credit only applies to your first four years of postsecondary education. Furthermore, to claim the credit, your modified adjusted gross income can't exceed $80,000 as a single tax filer, or $160,000 as a couple filing jointly.

While any tax credit you manage to snag could work wonders for your return, it especially pays to look into those credits that will actually pay you back. Even if you've never qualified for the aforementioned credits in the past, remember that the tax code changed a lot in 2018, so it never hurts to see what savings you might manage to eke out this season.