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Though the Congress is often regarded as an entity that wants nothing more than to take our hard-earned money, the reality is that it also makes a number of lucrative tax credits available to filers -- credits that could help many people pad their bank accounts.
As a refresher, a tax credit is a dollar-for-dollar reduction of one's tax liability. If you owe the IRS $2,000 and claim a $2,000 tax credit, that liability gets knocked down to $0.
There are a number of tax credits that have been around for a long time. But these three credits got a significant boost for the 2021 tax year.
1. The Child Tax Credit
Prior to 2021, the Child Tax Credit maxed out at $2,000 per child. In 2021, its value was raised to a maximum of $3,600 for children under age 6 and up to $3,000 for children aged 6 to 17. The credit also became fully refundable, whereas prior to 2021, it was only partially refundable. A fully refundable credit allows a tax filer to get paid for the credit's full value even if that filer owes the IRS no money.
2. The Child and Dependent Care Credit
The Child and Dependent Care Credit is for families who pay for childcare so they're able to go to work or look for work. Before 2021, filers could claim a portion of up to $3,000 in childcare expenses for a single child, or a portion of up to $6,000 in childcare expenses for two or more children. The portion in question would hinge on income and range from 20% to 35% of costs.
In 2021, the Child and Dependent Care Credit changed so filers could claim a portion of up to $8,000 in childcare expenses for one child, and up to $16,000 in expenses for two or more children. The portion of expenses eligible for a deduction also increased to a maximum of 50%.
All told, prior to 2021, the maximum value of the Child and Dependent Care Credit was 35% of $6,000, or $2,100. In 2021, the maximum value of the credit is 50% of $16,000, or $8,000. Also, the Child and Dependent Care Credit is fully refundable for the 2021 tax year, whereas previously, it was not refundable.
3. The Earned Income Tax Credit (EITC)
The EITC is a credit designed to help low-income tax filers. One good thing about the EITC is that it's always been fully refundable, and the same held true for 2021. However, the credit became easier to claim.
In 2021, single tax filers with no dependents could qualify for the EITC with a maximum income of $21,430. In 2020, single tax filers with no qualifying dependents could only have a maximum income of $15,820 to get the credit.
Meanwhile, for 2021, the maximum EITC value for filers with no qualifying dependents is $1,502. In 2020, it was $538.
Clearly, there were a lot of tax credit changes that took place in 2021. But tax credit rules and values can actually evolve from year to year, so it pays to keep tabs on those changes to ensure you're eking out the most savings.
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