Credits & Deductions

📘 Module 4: Credits & Deductions

How to Legally Lower Tax Liability & Boost Refunds

👋 Welcome to Module 4!

Not all tax situations are about how much someone made — sometimes it’s about what they can claim to reduce their tax bill. In this module, you’ll learn about:

✅ The most powerful tax credits for individuals & families
✅ How deductions lower taxable income
✅ Refundable vs. non-refundable credits
✅ How to legally get clients a bigger refund

📊 What's the Difference?

➤ Deduction

Reduces how much of your income gets taxed.
Example: If you earn $30,000 and deduct $2,000, you’re only taxed on $28,000.

➤ Credit

Reduces how much tax you owe — dollar for dollar.
Example: If you owe $900 in tax and get a $600 credit, you now owe just $300.

🔄 Refundable vs. Non-Refundable Credits

Type	What it Does	Example
Refundable	You get the full amount, even if you owe $0	Earned Income Credit (EIC), Additional CTC
Non-Refundable	Only reduces what you owe — no refund beyond $0	Lifetime Learning Credit, Saver's Credit

🎯 Most Common Tax Credits to Know

1. Earned Income Credit (EIC / EITC)

For working taxpayers with low-to-moderate income
Max credit: Up to $7,430 (2023)
Must have earned income from a job or self-employment
Can be claimed with or without children (higher with children)

Example:
A single mom with two kids and $24,000 income could get over $6,000 in EIC.

2. Child Tax Credit (CTC & ACTC)

$2,000 per qualifying child under 17
Up to $1,500 refundable through Additional Child Tax Credit (ACTC)
Must have earned at least $2,500 in income

3. American Opportunity Credit (AOC)

For college students in their first 4 years
Max: $2,500 per student
40% is refundable (up to $1,000)
Must have tuition expenses (1098-T form required)

4. Lifetime Learning Credit

For students in any year of higher education or continuing ed
Max: $2,000 per return (non-refundable)

5. Credit for Other Dependents

For kids over 17, elderly parents, or non-qualifying relatives
Credit: Up to $500
Not refundable

💡 Common Above-the-Line Deductions

These reduce AGI and help qualify for credits:

Student loan interest
HSA contributions
Educator expenses
Traditional IRA contributions
Self-employment health insurance
Moving expenses (military only)

✅ Module 4 Activity

Scenario Practice:

Client: Alicia Rivera

Single, 2 children (ages 4 and 8)
Earned $23,500 from a W-2 job
Paid $1,400 in daycare
Student loan interest: $600
Filed last year and received EIC

Instructions:

Which credits is Alicia eligible for?
Estimate her EIC range
Is her student loan interest deductible?
Would she qualify for CTC or ACTC?

📝 Module 4 Quiz

1. What is the difference between a credit and a deduction?
A) A deduction reduces income; a credit reduces taxes owed
B) A credit reduces income; a deduction gives money
C) They’re the same
D) A deduction adds to income

2. Which credit can give you money back even if you owe nothing?
A) Lifetime Learning Credit
B) Student loan interest deduction
C) Earned Income Credit
D) Credit for Other Dependents

3. What form reports college tuition payments?
A) 1099-MISC
B) 1098-T
C) 1099-NEC
D) 1040-S

4. Which credit applies to elderly parents or children over 17?
A) Child Tax Credit
B) Credit for Other Dependents
C) EIC
D) American Opportunity Credit

5. True or False: Clients must earn at least $2,500 to qualify for ACTC.
A) True
B) False

✅ Answer Key: