What Are Tax Credits? - Definition & Types

Instructor: Yuanxin (Amy) Yang Alcocer

Amy has a master's degree in secondary education and has taught math at a public charter high school.

By claiming the tax credits that you qualify for on your tax return, you can get a reduction in the amount of taxes you owe. Read this lesson to learn about some of the tax credits available to you.

What Is a Tax Credit?

As you go through your taxes, you may have noticed a section about the various tax credits that you may qualify for. These tax credits go towards your tax payments, giving you a refund so to speak. The IRS defines a tax credit as a tax incentive that gives you credit that applies towards the taxes you owe.

Let's take a look at the most common tax credits that you may qualify for.

Earned Income Tax Credit

The first one we will look at is the Earned Income Tax Credit or EITC for short. This tax credit was created in 1975 to help those people who work but don't earn that much. To qualify for this credit, you have to be between 25 and 65 years of age. You and your spouse, if you're married, must have valid Social Security numbers. You cannot be claimed as a dependent on someone else's tax return. If you are married, you have to file jointly. If you have dependents, then your EITC will increase per child. You can qualify for this credit even if you are self-employed. There is a worksheet you fill out to determine how much credit you qualify for. If you work and earn income, this is one tax credit you should always check to see if you qualify for.

Lifetime Learning Credit

If you are a student, and your modified adjusted gross income is no more than $65,000, or $130,000 if you are married (for tax year 2015), then you should check to see if you qualify for the Lifetime Learning Credit. This is a credit for students that gives as much as $2,000 per tax return. This credit goes towards qualified tuition and enrollment fees at eligible educational institutions.

Saver's Credit

The Saver's Credit is a tax refund that helps those with moderate income save for retirement. To qualify, you must contribute to your IRA and your adjusted gross income must be less than $30,500 if you are single or married filing separately, $45,750 if head of household, or $61,000 if married filing jointly (for tax year 2015). This tax credit can give you as much as $1,000 if single or $2,000 if married filing jointly. The amount is often less than the maximum due to other credits and deductions that are given.

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