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By Dan Dzombak / The Motley Fool
November 24, 2014
Alina Solovyova-Vincent—Getty Images

The IRS provides multiple tax credits for low- to moderate-income taxpayers to lower what they owe the government. Unlike tax deductions, which lower your taxable income, tax credits directly lower the amount of money you owe the government.

Let’s go over seven tax credits you may be able to claim to lower your tax bill this year. But first, a quick primer on tax credits and the difference between refundable and nonrefundable credits.

Tax credits: The basics

A tax credit allows you to directly subtract the amount of the credit from your taxes due. Say you are single and had $50,000 in income. Based on the 2014 tax brackets, with the standard deduction and one personal exemption, you would owe a little over $5,819 in taxes. A $5,000 tax credit would cancel out all but $819 of your taxes owed.

There are two types of tax credits: refundable tax credits and nonrefundable tax credits. You can get money back for a refundable tax credit even if you didn’t earn any income or pay any taxes. A nonrefundable tax credit is only applied to your taxes owed.

Let’s say you owe $1,000 in taxes from income during the year, and at the end of the year you claimed a $2,500 tax credit. If the tax credit is refundable, you’ll get $1,500 back from the government. If the tax credit is nonrefundable, then it is deducted from the taxes you owe — so in this example, you don’t owe the government anything, but you can only zero out your taxes, meaning you miss out on the remaining $1,500 of the tax credit.

The IRS provides multiple tax credits to lower what you owe the government; see if you can take advantage of any of them.

1. Lifetime Learning Credit (nonrefundable)

The Lifetime Learning Credit allows taxpayers who take postsecondary school classes, or whose dependents take postsecondary school classes, to claim as a tax credit 20% of qualified education expenses up to a maximum $2,000 tax credit. The advantage of this tax credit is that it is open to anyone at any point in his or her life, unlike the American Opportunity Tax Credit, which I will detail next.

The full Lifetime Learning Credit is only available to individual taxpayers who make $52,000 or less, or $104,000 for a married couple filing jointly. The credit phases out for individual taxpayers with income between $52,000 and $62,000 and married couples filing jointly with income between $104,000 and $124,000. Those who earn more than the upper threshold are ineligible for the Lifetime Learning Credit.

2. American Opportunity Tax Credit (partially refundable)

The American Opportunity Tax Credit differs from the Lifetime Learning Credit in that it is only available for eligible students for their first four years of higher education. The credit allows you to claim up to $2,500 per eligible student. Forty percent of the credit is refundable, so there is a maximum refund of $1,000. You cannot claim both this credit and the Lifetime Learning Credit for the same student in one tax year. The full American Opportunity Tax Credit is available to individuals with incomes less than $80,000 ($160,000 for married couples filing jointly), and the credit phases out for individuals with incomes of more than $90,000 ($180,000 for married couples filing jointly).

3. Retirement Saver’s Tax Credit (nonrefundable)

For low-income taxpayers who are not full-time students, the government provides a tax credit for contributing to a retirement savings plan such as an IRA, 401(k), etc. The credit is anywhere from 10% to 50% of up to $2,000 of your retirement plan contributions (or $4,000 for married couples filing jointly).

Source: IRS

4. Earned Income Tax Credit (refundable)

The Earned Income Tax Credit is a refundable tax credit for low- to moderate-income working taxpayers to raise their incomes without discouraging work. The income limit for an individual is $14,590 but rises significantly for each child you can claim as a dependent. You can read more about the earned income tax credit here.

5. Child Tax Credit (depends)

The Child Tax Credit provides up to $1,000 per qualifying child for individual taxpayers with income less than $75,000 (or $110,000 for married filing jointly). The child tax credit is nonrefundable, however, for taxpayers whose child tax credit is less than $1,000 per child there is an additional child tax credit that is refundable that can raise the two tax credits to a total of $1,000 per qualifying child. You can read more about the child tax credit here.

6. Premium Tax Credit (refundable)

The Premium Tax Credit is for low- to moderate-income taxpayers who get health insurance through the health insurance exchanges, i.e., Obamacare. To be eligible for the credit, you must buy health insurance through the exchange, be ineligible for coverage through an employer or government plan, not be married filing separately, and meet certain income limits. The Premium Tax Credit has both minimum and maximum income limits, because if your income falls below a certain level, you are eligible for Medicaid. Your household income must be between 100% and 400% of the federal poverty line — the current dollar amounts of these limits, which change with family size, are shown below:

Poverty Level Individual Family of 2 Family of 4
100% $11,490 $15,510 $23,550
400% $45,960 $62,040 $94,200

Source: IRS.

To estimate your premium tax credit, it is best to use an online calculator. Note that Obamacare contains a penalty for not having insurance unless you meet certain exemptions. Motley Fool contributor Todd Campbell recently examined how much Obamacare penalizes you for not having health insurance.

7. Elderly and Disabled Tax Credit (nonrefundable)

The Elderly and Disabled Tax Credit is for low-income taxpayers over age 65 or those who are retired on permanent and total disability and received taxable disability income during the tax year. Eligibility is rather strict. To qualify for the elderly and disabled tax credit, individual taxpayers must have income less than $17,500 ($25,000 for married filing jointly) and nontaxable income (nontaxable Social Security, pension, annuities, or disability income) of less than $5,000 ($7,500 for married filing jointly). The tax credit can theoretically be as high as $500, but the calculations for the credit are complicated enough that the IRS will do them for you if you ask. You can read more about the Elderly and Disabled Tax Credit Here.

More ways to reduce your taxes

As Mitt Romney famously (or infamously, depending on whom you ask) said: “I pay all the taxes owed. And not a penny more.” Whatever your political leanings, those are wise words to live by. The U.S. tax code contains multiple ways to lower what you owe the government. Be sure you don’t end up paying more than what you should really owe.

Dan Dzombak can be found on Twitter @DanDzombak, on his Facebook page DanDzombak, or on his blog where he writes about investing, happiness, the secret to success in life, what is success to you, the NY Lottery, and the Fortune 500. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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