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These are the main tax credits and provisions to look out for in 2021

Doing your taxes isn't always simple, but taxpayers should be extra thorough in 2021.

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Doing your taxes never winds up being as simple as you'd like. But this year, take extra time to make sure you're taking advantage of all the different credits that could help you save on your taxes — and potentially score a bigger refund.

The federal government's coronavirus relief packages — from last March's CARES Act through the latest American Rescue Plan currently in Senate negotiations — include modified tax credits to help give families more money on top of stimulus checks and student loan relief.

Below, CNBC Select explains the difference between a tax credit and a tax deduction, and what credits you should look out for this year.

Difference between a tax credit and a tax deduction

Tax credits and tax deductions have a similar impact on how much you pay in taxes, but they are different.

A deduction lowers your taxable income, which can affect the tax rate used to calculate your taxes owed. This might give you a larger refund because you're simply taxed less.

Meanwhile, a tax credit reduces how much you owe in taxes by essentially giving taxpayers a refund.

Here's an example of how deductions and credits impact your taxes:

A single person makes $45,000 per year and is in the 22% federal tax bracket. They're able to take advantage of some deductions that lower their adjusted gross income (AGI) to $39,000. This would drop them down to an estimated tax rate of 12%, according to TurboTax's calculator.

A tax credit, on the other hand, is applied once the person's taxes are calculated, whether at the 12% or 22% rate. Once their AGI is determined, and they are taxed at their respective rate, tax credits get subtracted from whatever total they owe the IRS.

With both deductions and tax credits, there are usually strict income limits, so not everyone can take advantage of these tax breaks.

Tax credits to look out for in 2021

Earned Income Tax Credit (EITC)

If your earned income was higher in 2019 than in 2020, you can "look back" and use the 2019 figure to calculate your EITC for 2020. The EITC gives low-to-middle-income workers a portion of their earned income, so a higher reported amount gives taxpayers a boost.

The 2020 income limit for the EITC is $15,820 for single people with no dependents and $21,710 for married couples filing jointly. Income limits rise to $50,594 (single) and $56,844 (filing jointly) for families with three or more dependents.

The maximum amount you can claim increases if you have dependents:

  • No children: $538
  • One child: $3,584
  • Two children:  $5,920
  • Three children: $6,660

Learn more and figure your estimated credit on the IRS website.

Child Tax Credit (CTC)

Like the EITC, the CTC is calculated as a percentage of your reported income. The "lookback" provision also applies, letting taxpayers use their 2019 income to calculate their 2020 credit. The CTC is worth $2,000 per qualifying child.

Children qualify as your dependents when they:

  • are your biological child, stepchild, eligible foster child, sibling, step-sibling, half-sibling or their descendant
  • are under age 17 at the end of the tax year
  • don't provide more than half of their own financial support during the tax year
  • have lived with you for more than half of the tax year (some exceptions exist)
  • are claimed as a dependent on your tax return
  • do not file a joint tax return for the year (except to claim a withheld refund)
  • are a U.S. citizen, U.S. national, or U.S. resident alien
  • have a Social Security Number

The child tax credit is also subject to income limitations based on your AGI. For tax year 2020, the income limit phaseout begins at $400,000 for married filing jointly and $200,000 for single or head of household.

Learn more and figure your estimated credit on the IRS website.

Recovery Rebate Credit

If you haven't received one or either of the stimulus checks issued in 2020, you'll have to file for a Recovery Rebate Credit when you do your taxes this year in order to get the money you're owed.

This is good news for people who earned a higher income in 2019 than they did in 2020 and did not initially qualify for a stimulus check because of the income limits.

The two 2020 stimulus checks (worth $1,200 and $600) went to individuals making up to $75,000 or $112,500 if filing as head of household. The income limit for married couples filing jointly was $150,000. After that, the checks got smaller as incomes got higher, eventually phasing out completely for individuals making more than $100,000 and couples earning more than $200,000 in 2019.

The Recovery Rebate Credit is a tax credit against your 2020 income tax. The IRS explains that taxpayers who claim this credit will either see an increase in their tax refund or a decrease in the amount of the taxes they owe.

Saver's Credit

The Saver's Credit is available to taxpayers 18 and older who are not students and not listed as a dependent on someone else's return. It is a credit for making eligible contributions to your IRA or employer-sponsored retirement plan.

The amount of the credit depends on your AGI. The maximum adjusted gross income is $65,000 (married filing jointly), $48,750 (head of household) and $32,500 (individuals).

Depending on your AGI, your Saver's Credit could be 50%, 20% or 10% of the sum of one of the following amounts:

  • Contributions you make to a traditional or Roth IRA
  • Elective salary deferral contributions to a 401(k), 403(b), governmental 457(b), SARSEP, or SIMPLE plan
  • Voluntary after-tax employee contributions made to a qualified retirement plan (including the federal Thrift Savings Plan) or 403(b) plan
  • Contributions to a 501(c)(18)(D) plan
  • Contributions made to an ABLE account for which you are the designated beneficiary (beginning in 2018)

This credit is worth up to $2,000 (or $4,000 when filing jointly). TurboTax offers a detailed breakdown of whether you'll qualify for 10%, 20% or 50% of the above sums.

Learn more about the Saver's Credit on the IRS website.

Bottom line

Speak to your accountant or double-check your return when you file on your own using a tax software like TurboTax or H&R Block. If you don't normally file with a tax professional such as an accountant, this might be the year to consider it if the potential savings could recoup the cost. Many tax software programs offer live support and accountant review for an extra cost. It could be worth the expense if it helps you get a bigger tax return.

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