Even procrastinators are starting to think about getting their taxes done now, and when they do, they'll face tax forms they've never seen before, thanks to tax reform. A new, shorter 1040 form might look inviting, but the trade-off is that there are several new schedules that go with the main return.
Schedule 3 offers a way for taxpayers to save money on their taxes by taking advantage of certain tax credits. The credits on Schedule 3 are nonrefundable, which means that unlike with refundable credits, you can't get extra money back once your net taxes paid drops to zero. However, if you've had a lot of taxes withheld from your paycheck, then you're a prime candidate to use these tax credits to boost the size of your refund. Below, we'll look at Schedule 3 more closely to see the five main ways that you can save.
Image source: IRS.
Line 48: Foreign tax credit
The foreign tax credit applies to taxpayers who have income from sources outside the U.S., whether it's from wages or salaries or from overseas investments. The general idea of the foreign tax credit is to help you avoid getting taxed twice on the same income, and so if a foreign jurisdiction had primary taxing authority over the income, the U.S. will offer a tax credit to offset all of part of your overseas tax payment. Whether you paid the foreign tax directly or it was withheld from income you receive, the credit is generally available.
One thing to remember is that the credit is typically limited to whatever the U.S. tax rate on the income would've been. So if you got taxed in a high-tax country, the amount of your foreign tax credit might be less than the full amount of tax you paid. That's consistent with the desire to avoid double taxation, but it does add some complexity to the calculations of how much you get to claim as a credit.
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Line 49: Child and dependent care credit
The child and dependent care credit gives a tax credit of 20% to 35% on up to $3,000 in child care or other dependent care expenses for one dependent, or $6,000 for two or more dependents. The percentage of the credit depends on your income, with low-income taxpayers getting the highest 35% credit rate and higher-income taxpayers maxing out at 20%.
One thing to remember, though, is that for joint filers, the credit is only available if both spouses have earned income. Single-earner families can't claim the credit, with the rationale that the tax break is intended for those who need care to produce income rather than just for convenience.