By David Collins
Certified Public Accountant
HCP columnist


I have been a CPA since 1978 and have had my own tax and accounting practice in Hillsboro since 1982. There has been a lot of confusion over the years about the differences between tax deductions and tax credits.

Tax deductions lower the taxable income while credits lower the actual taxes. For example, if you have a $1,000 deduction and you are in the 10% bracket, you lower your taxes by $100.

If you have a $1,000 tax credit, you lower your taxes by $1,000.

Listed below are eight of the more common tax credits available to individuals. There are quite a few more that are available, especially to businesses. Some credits are refundable or partially refundable even if the taxpayer has no tax liability. Some credits only reduce your taxes. Some unused credit can be carried over to future years and some are lost forever.

• Earned income credit. This refundable credit is available to taxpayers who have earned income and dependents who are qualifying children. A smaller credit is allowed to taxpayers with no children and are between the ages of 25 to 64. The credit is based on the taxpayer’s filing status, earned income and number of qualifying children (maximum of 3). The maximum credit can be over $6,500. Earned income is defined as wages or self-employment income. Various other requirements must be met and does phaseout as income increases. Any credit in excess of tax liability is refundable.

• Child tax credit. Taxpayers may claim this credit for a dependent qualifying children under 17 years of age. This credit was increased from $1,000 to $2,000 beginning in 2018 when the dependent exemption was eliminated. A $500 credit is available for other qualifying dependents. This credit is phased out for higher income taxpayers. Up to $1,400 of this credit qualifies as a refundable credit. Any unused credit does not carryover.

• Child and dependent care credit. Taxpayers may claim a nonrefundable credit for qualifying child care expenses paid for children under 13 or a dependent or spouse who is disabled. The credit is limited to lower income taxpayers and has various rules to qualify. Any unused credit does not carryover.

• American opportunity tax credit. This postsecondary educational credit is available to you, your spouse, or any dependent you claim on your tax return. It does not make any difference who pays the tuition or if a loan is involved. Scholarships must be applied against the tuition first. The maximum credit is $2,500 for each eligible student and 40% of the credit may be refundable. There are eligibility requirements and income limits to qualify for this credit. Tuition, enrollment fees and course materials are qualified expenses. No room and board expenses are allowed. You need to obtain a form 1099-T from the educational institution. Any unused credit cannot be carried over.

• Lifetime learning credit. This educational credit is available to taxpayers for postsecondary education and courses to acquire or improve job skills. It is a 20% credit and limited to $2,000 per return. It can be used for unlimited tax years. There is an income limit based on filing status. Qualifying expenses include tuition, enrollment fees and materials purchased from the educational institution. No form 1098-T is required. Any unused credit cannot be carried over.

• Retirement savings contribution credit. This credit is available to taxpayers who contributed to a retirement account. This may include a traditional IRA, Roth IRA, ABLE account or elective deferrals to a 401(k) or another qualified employer plan. Income limits apply. This credit is nonrefundable and any unused credit cannot be carried over.

• Residential Energy Credit. This nonbusiness credit used to be available for various energy saving items. Now the credit is limited to qualifying solar electric, solar water heating, small wind energy and geothermal heat pump for a home you own. Qualified fuel cell properties must be installed in your main home to qualify. Any unused credit is available to carry over.

• Adoption Credit. This is a 100% credit for up to a limit of $14,080 for 2019. There are various rules and limitations, including an income limit for this credit. This credit is nonrefundable but available for carryover.

As you can see, tax credits can create significant tax savings and refunds. The IRS is alert to a lot of scams involving these credits and is paying a lot of attention. If you qualify for one of these credits, make you have all the documentation necessary in case of an audit.

If you have a general question, please email me at taxtips dcollinscpa@sbcglobal.net. I will pick one or two questions that I feel will interest the most people and include it in future articles. Other questions I will try to answer in a return email. If you have a more complicated situation, I suggest you contact a tax professional.