The filing deadline for the 2021 tax season has been extended to May 19. This means there is extra time to ensure you maximize tax break claims, which is especially important after a unique year with many experiencing employment and income situation changes. Most individuals take full advantage of deductions that reduce the amount of income subject to federal tax, but there are also a variety of credits that can lower the amount of tax owed, or even increase your refund. Credits are considered non-refundable where you are only compensated up to the amount of your tax liability, or they can be refundable, which means you receive the full value, even if it is more than the tax you owe. Focusing primarily on the latter, here are a few common tax credits that could help you make the most of your 2021 tax situation.
Solar Investment Tax Credit
Homeowners who purchased and installed a solar energy system during the past year are eligible for the solar investment tax credit (ITC). With ITC you can claim up to 26% of the cost of the system on your federal income tax. ITC is not exactly refundable, but if the credit exceeds your tax liability you can carry forward the remainder, and still claim the full value amount over subsequent years. The cost of a home solar battery also qualifies for the ITC if it is charged with renewable energy. The ITC may not apply to you for this year, but if energy conservation and saving money on your electricity bill are important, in addition to reducing your tax burden, you should consider taking advantage of this credit in the future. Do not delay though, because the credit drops to 22% in 2023 and is currently set to expire in 2024.
Earned Income Tax Credit
The Earned Income Tax Credit (EITC) primarily benefits low-to-moderate-income earners. The value of the fully refundable credit varies depending on income level and the number of children in the family. The current tax year credit ranges from $538 to $6,660. Income limits range from $15,820 for a single household with no children to $56,844 for a married couple filing jointly with three or more children. Typically, the credit is based on your current income, but this year you can use your 2019 income to calculate the tax break. This is beneficial if you had a higher qualifying income in 2019 than in 2020. Most importantly, you must file a tax return to receive the credit, even if your tax liability is zero. Amazingly, about 5 million of those eligible for the credit do not file a return or fail to claim the benefit each year.
American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC) is one of two education-related federal tax credits. Qualification for AOTC is harder, but it can pay a higher benefit. You do not have to be a student to take the credit on your tax return, but you must be claiming a student dependent or be making post-secondary education payments for a spouse. Students include anyone enrolled in one of their first four years of post-secondary education on at least a half-time basis. To claim the full credit, your modified adjusted gross income can be no more than $160,000 if filing jointly or $80,000 for any other status. The credit phases out completely at $180,000 for joint filers or $90,000 for singles. Eligible expenses include tuition, books, supplies and equipment. Expenses paid for by student loans are covered, but not those funded from a 529 savings plan, scholarship or grant. The maximum credit per student is $2,500, with the first $2,000 of qualified expenses credited at 100% and the next $2,000 at 25%. One of the big benefits of the credit is that it is partially refundable. You can receive a refund of 40% for the amount that exceeds your tax liability, up to a $1,000 maximum.
Recovery Rebate Credit
The Recovery Rebate Credit is unique to 2020. If you did not receive either of the economic impact payments given in 2020 and early 2021, or your situation has changed, you could be eligible for this refundable credit. If you are one of the many who qualified for the economic impact payments but did not get it because you neglected to register for it then you are eligible for the Recovery Rebate Credit. There are also some that qualify but did not get the payment because of IRS errors, or they had not filed a tax return. Another reason you might qualify now is if your 2020 income decreased due to job loss or fewer hours worked and is now below the threshold for payments. The birth of a child during the year makes you eligible to claim a credit for your new dependent.
These are just a few of the many tax credits available to help you make the most of your tax situation. Everyone is different, so take the extra time to explore your options and find all the tax credits that can save you money.