The Tax Credits Families Miss Most Often

Some tax credits reduce a bill, and others pay money out even when no tax is owed at all. The second kind is where the largest sums sit for lower and middle income households, and a substantial number of eligible people never claim them.

The reason is straightforward. Claiming requires filing a return, and people who owe no tax frequently do not file, which means the credit is never requested. Money that was owed to the household simply stays where it is.

The Earned Income Credit

This is the largest of the refundable credits and the most commonly missed. It is aimed at working households on lower and moderate incomes, and the amount rises considerably with the number of children in the household.

Eligibility depends on earned income, filing status, and the number of qualifying children, and the income ceiling is higher than most people assume, particularly for larger families. Workers without children can also qualify, in smaller amounts, which is a fact that is very widely unknown.

Because it is refundable, it produces a payment even where no tax is due. For a household on a modest income the sum can be significant, and it recurs annually for as long as eligibility continues.

Credits for Children and Dependants

• The child tax credit, for qualifying children under a defined age
• The credit for other dependants, covering older children and dependent relatives
• The child and dependent care credit, for childcare costs that allow you to work
• The adoption credit, which covers qualifying adoption expenses

The care credit is frequently missed by households paying for childcare, because the connection between paying for care and claiming a credit is not obvious. It requires the provider's details, which is a reason to keep those records through the year rather than searching for them at filing time.

The credit for other dependants catches many households supporting an adult relative or an older child. Support given to a parent, in particular, frequently qualifies and is rarely claimed.

Education and Retirement Credits

Education credits cover tuition and related costs for students, including part time and adult learners returning to study. Households assume these apply only to conventional full time students, and that assumption costs them.

A separate credit rewards retirement contributions by lower and moderate income earners, effectively paying back a portion of what was saved. It is among the least known credits available and applies to contributions people are already making through work.

Claiming for Previous Years

This is the point most worth knowing. Where a credit was missed in a previous year, an amended return can generally be filed for a defined period afterwards, and the credit claimed retroactively.

For a household that has not filed for several years while eligible for refundable credits, that can amount to a considerable sum. Free preparation services will handle prior year returns as well as the current one.

• Check whether you filed in each of the past few years
• Check whether credits were claimed on the returns that were filed
• Free preparation programs can review prior years and file amendments
• Keep records of childcare, education, and dependant support through the year

Getting It Right Without Paying for It

Free filing options and free in person preparation, covered elsewhere on this site, both handle these credits and are staffed by people trained specifically to identify them. That is their main value beyond the cost saving.

Volunteer preparers routinely find credits that filers using software alone had missed, because they ask questions the software does not think to ask. For a household with children, dependants, or education costs, that conversation is usually worth more than the preparation fee it saves.

State Credits on Top of Federal Ones

Many states operate their own versions of these credits, paid in addition to the federal amount rather than instead of it. State earned income credits are the most common, typically calculated as a percentage of the federal credit.

Because they are automatic in some states and require a separate claim in others, households sometimes receive the federal credit and miss the state one entirely. Checking what your state offers takes a few minutes and occasionally adds a substantial amount.

• State earned income credits, often a percentage of the federal figure
• State child and dependent care credits
• Property tax and rent relief credits, which many renters do not realize apply to them
• Credits for specific circumstances such as caring for a relative

Property tax and rent relief programs are worth particular attention, since renters frequently assume anything described as property tax relief cannot apply to them. In several states it does, calculated on rent paid as a proxy.

Why Filing Matters Even With No Tax Due

The single most consequential point here bears repeating plainly. Refundable credits are only paid to people who file, and a household owing no tax has no obligation to file, which is exactly why the money goes unclaimed.

If your household has children, has earned income, and has not filed in recent years, there is a reasonable chance money is sitting unclaimed for each of those years. A free preparation service will check and file amendments where they apply, at no cost, and the review itself takes one appointment.