You hopefully already know that limits on many retirement accounts tend to rise each year to account for inflation — and 2020 will be no exception to that, as we recently reported.
But these are not the only limits that the IRS imposes or oversees that tend to increase annually. Limits on certain federal income tax credits also tend to rise each year to account for inflation.
The IRS recently announced that the following two credits are among those for which limits will rise for tax year 2020 — the one for which your tax return is due by April 2021.
Also known as the Retirement Savings Contributions Credit, this tax break is for folks who save money in certain types of retirement accounts — including 401(k) plans and individual retirement accounts (IRAs) — and who are otherwise eligible for the credit.
Income limits: For 2020, you might be eligible for this credit if your adjusted gross income, or AGI (found on your tax return), is not more than:
- Married filing jointly: $65,000 (up from $64,000 for 2019)
- Head of household: $48,750 (up from $48,000 for 2019)
- All other tax-filing statuses: $32,500 (up from $32,000 for 2019)
Credit limits: For 2020, the maximum amount that the Saver’s Credit could be worth is unchanged. It remains $4,000 for folks whose tax-filing status is married filing jointly and $2,000 for those with any other tax-filing status.
To learn more: Check out “Most Workers Don’t Know This Retirement Tax Credit Exists.”
Earned Income Tax Credit
This tax credit is for eligible workers. More specifically, it’s for folks with earned income, such as wages, as opposed to income from investments.
In fact, for 2020, your investment income must be no more than $3,650 to qualify for the credit. (That is up from $3,000 for 2019.)
Unlike the Saver’s Credit, the Earned Income Tax Credit is refundable. That basically means it not only reduces your tax bill, but also might result in you receiving a tax refund or a receiving a bigger refund than otherwise.
Income limits: For 2020, you might be eligible for the Earned Income Tax Credit if your AGI is not more than:
- Married filing jointly: $21,710 to $56,844, depending on whether and how many of your children qualify for the credit (up from $21,370 to $55,952 for 2019)
- All other tax-filing statuses: $15,820 to $50,594, depending on whether and how many of your children qualify for the credit (up from $15,570 to $50,162 for 2019)
Credit limits: For 2020, the maximum amount that this credit is worth ranges from $538 (if you have no qualifying children) to $6,660 (if you have three or more qualifying children). Those amounts have increased from $529 and $6,557, respectively, for 2019.
To learn more: Visit the”Earned Income Tax Credit” page on the IRS website.
Other tax credits
The Saver’s Credit and Earned Income Tax Credit are among the few federal income tax credits that have limits that tend to change each year, but they are not the only tax credits that Uncle Sam offers.
Other federal tax credits that are currently available include:
- Child Tax Credit
- Credit for Other Dependents
- American Opportunity Tax Credit (an education credit)
- Lifetime Learning Credit (an education credit)
It’s worth taking a moment to see if you might qualify for these or any other tax credits, as they would directly impact your tax bill. As we explain in “3 Key Questions Every Taxpayer Must Answer“:
“A tax deduction lowers your taxable income, while a tax credit lowers your tax bill dollar for dollar.”
For example, a $1,000 tax deduction would lower your taxable income by $1,000 — which may or may not lower the amount of money you owe Uncle Sam — while a $1,000 tax credit would take $1,000 off the amount you owe.
For help determining whether you’re eligible for a given tax credit, check out the IRS’ Interactive Tax Assistant, which is a free online tool.
What’s your take on this news? Sound off below or on the Money Talks News Facebook page.
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