Even procrastinators are starting to think about getting their taxes done now, and when they do, they'll face tax forms they've never seen before, thanks to tax reform. A new, shorter 1040 form might look inviting, but the trade-off is that there are several new schedules that go with the main return.
Schedule 3 offers a way for taxpayers to save money on their taxes by taking advantage of certain tax credits. The credits on Schedule 3 are nonrefundable, which means that unlike with refundable credits, you can't get extra money back once your net taxes paid drops to zero. However, if you've had a lot of taxes withheld from your paycheck, then you're a prime candidate to use these tax credits to boost the size of your refund. Below, we'll look at Schedule 3 more closely to see the five main ways that you can save.
Line 48: Foreign tax credit
The foreign tax credit applies to taxpayers who have income from sources outside the U.S., whether it's from wages or salaries or from overseas investments. The general idea of the foreign tax credit is to help you avoid getting taxed twice on the same income, and so if a foreign jurisdiction had primary taxing authority over the income, the U.S. will offer a tax credit to offset all of part of your overseas tax payment. Whether you paid the foreign tax directly or it was withheld from income you receive, the credit is generally available.
One thing to remember is that the credit is typically limited to whatever the U.S. tax rate on the income would've been. So if you got taxed in a high-tax country, the amount of your foreign tax credit might be less than the full amount of tax you paid. That's consistent with the desire to avoid double taxation, but it does add some complexity to the calculations of how much you get to claim as a credit.
Line 49: Child and dependent care credit
The child and dependent care credit gives a tax credit of 20% to 35% on up to $3,000 in child care or other dependent care expenses for one dependent, or $6,000 for two or more dependents. The percentage of the credit depends on your income, with low-income taxpayers getting the highest 35% credit rate and higher-income taxpayers maxing out at 20%.
One thing to remember, though, is that for joint filers, the credit is only available if both spouses have earned income. Single-earner families can't claim the credit, with the rationale that the tax break is intended for those who need care to produce income rather than just for convenience.
Line 50: Education credits
Several tax breaks are available for education, including the American Opportunity credit for undergraduate work and the Lifetime Learning credit for a broader range of educational expenses. The American Opportunity credit offers up to $2,500 per year for as many as four years, while the Lifetime Learning credit maxes out at $2,000 per year but offers an unlimited number of years to claim it.
The full amount of these credits doesn't go on Line 50, however, because 40% of any American Opportunity credit is refundable and therefore shows up elsewhere on your tax return. However, you'll end up including the remaining 60% of the American Opportunity credit plus any Lifetime Learning credit you're owed on this line, and that amount can cut your taxes substantially.
Line 51: Saver's credit
Line 51 covers the retirement savings contribution credit, better known as the saver's credit, to low- and middle-income taxpayers. The credit pays you back 10%, 20%, or 50% of up to $2,000 in contributions to IRAs, 401(k) plans, or similar retirement savings vehicles.
The exact amount of the credit depends on your income and filing status, with the top amounts reserved for joint filers making less than $38,000 and singles making $19,000 or less. But with at least some credit being available for joint filers with incomes up to $63,000, it's worth looking to see if you qualify.
Line 53: Residential energy credit
Finally, the last nonrefundable credit on Schedule 3 is the residential energy credit. Certain home improvements involving solar electric or water-heating projects, small wind energy installations, or geothermal heat pumps can qualify for a 30% tax credit. Fuel-cell installations have separate credit provisions of up to $1,000 per kilowatt of generating capacity.
These credits have already gotten extended through the 2021 tax year. Some related energy credits technically expired at the end of 2017, but the provisions described above aren't part of the debate over tax extenders.
Get as big a tax break as you can
If you like tax credits, you'll want to take a good look at Schedule 3. You might not be able to use all the tax breaks on the form, but you can at least get a sense of what's available and start planning now for how to get a bigger credit against your taxes in 2019 and beyond.