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Understanding Housing Tax Credits: What They Are and How They Work

Housing tax credits are financial benefits built into the U.S. tax system that reduce the amount of federal income tax a household owes. Unlike tax deductions, which lower your taxable income, tax credits directly reduce your tax bill dollar-for-dollar. If you owe $2,000 in taxes and receive a $1,500 tax credit, your tax liability drops to $500.

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The primary housing-related tax credits available to homeowners and renters include the Earned Income Tax Credit (EITC), the Child and Dependent Care Credit, and property tax deductions (though deductions differ from credits). Some states and localities offer additional housing credits. These programs exist because Congress recognizes that housing costs consume a significant portion of many households' budgets—typically 25 to 50 percent of gross income.

According to the Internal Revenue Service, approximately 27 million tax filers claimed the EITC in 2022, representing about 5.5 percent of all tax returns filed. Of those claiming the EITC, many were renters or homeowners struggling with housing affordability. The credit can range from a few hundred to several thousand dollars annually, depending on income level and family composition.

Housing tax credits function differently from housing assistance programs like Section 8 vouchers or public housing. Tax credits are claimed when you file your federal tax return, typically between January and April. You do not receive money upfront; rather, the credit reduces what you owe the IRS or increases your tax refund if you are owed money back.

Practical Takeaway: Understanding that tax credits directly reduce your tax bill—rather than lowering your taxable income—helps you recognize their real value in your financial situation. A $1,000 credit is worth exactly $1,000 in tax savings, making it one of the most valuable types of tax benefits available.

The Earned Income Tax Credit (EITC) and Housing Costs

The Earned Income Tax Credit is the largest tax credit program in the United States, providing refundable tax relief to working people with low to moderate incomes. "Refundable" means that if your credit exceeds your tax liability, the IRS sends you the difference as a refund. In 2023, the maximum EITC was $3,995 for people without qualifying children, and $3,733 for those with one qualifying child. Families with two qualifying children could receive up to $6,164, and those with three or more qualifying children could receive up to $6,935.

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While the EITC itself does not specifically target housing costs, the money people receive from this credit often goes toward housing expenses. Data from the U.S. Census Bureau indicates that working families with children spend an average of 28 percent of their income on housing. For many EITC recipients, the annual credit provides crucial funds that can cover rent increases, mortgage payments, property taxes, or home repairs that might otherwise strain their budgets.

To receive the EITC, you must meet income thresholds that vary by filing status and number of qualifying children. In tax year 2023, single filers without children had to earn less than $16,810, while married couples filing jointly without qualifying children had an income limit of $22,410. These income limits are adjusted annually for inflation, so they change year to year.

Many people do not claim the EITC because they are unaware of it or uncertain whether they meet the requirements. The IRS estimates that approximately 20 percent of eligible EITC claimants do not claim the credit. This represents billions of dollars in unclaimed tax relief annually. Community organizations, tax preparation nonprofits, and free tax clinics often assist people in understanding whether they may be eligible and in filing their returns correctly to claim the credit.

Practical Takeaway: If you work but earn a low to moderate income, you may benefit from learning more about the EITC structure and income limits. The credit is designed specifically for working people, so having employment income—even part-time—may make you a candidate for this substantial tax benefit.

Navigating the Child and Dependent Care Credit

The Child and Dependent Care Credit provides tax relief for working parents and guardians who pay for child care or care for other dependents while they work. This credit can help offset a portion of housing costs indirectly by reducing the tax burden on families managing multiple expenses. In 2023, you could claim a credit of between 20 and 35 percent of qualifying child care expenses, depending on your adjusted gross income (AGI).

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The maximum qualifying expenses are $3,000 per year for one dependent and $6,000 per year for two or more dependents. This means the maximum credit ranges from $600 to $2,100 for one dependent, and $1,200 to $4,200 for two or more dependents, depending on your income level. Families with lower incomes receive a higher percentage of their expenses as a credit, while those with higher incomes receive a lower percentage.

Qualifying expenses include payments to licensed day care centers, preschools, after-school programs, summer day camps, and in-home care providers. However, expenses for overnight camps, tuition for kindergarten and above (with exceptions), or payments to family members do not generally count. The care must be for a child under age 13 or a disabled dependent of any age.

To claim this credit, you must have earned income from employment, self-employment, or business income. Additionally, you must file your tax return using Form 2441 and provide the name, address, and tax identification number of the care provider. Many families do not claim this credit because they are unaware of it, do not track their expenses carefully, or do not have the provider's tax identification information readily available. Community tax assistance programs often help families gather this information and claim the credit.

Practical Takeaway: If you pay for child care while working, gathering receipts and provider information throughout the year makes claiming this credit straightforward when tax time arrives. The credit effectively reduces the out-of-pocket cost of child care, indirectly freeing resources for housing and other necessities.

Property Tax and Mortgage Interest Deductions: What You Should Know

Homeowners often benefit from deductions (not credits) related to housing costs. The mortgage interest deduction allows homeowners to deduct the interest paid on a mortgage from their taxable income. Similarly, the property tax deduction allows homeowners to deduct state and local property taxes. These are deductions rather than credits, meaning they reduce your taxable income rather than directly reducing your tax liability. However, understanding how they work helps you see the full picture of housing-related tax benefits.

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Beginning in 2018, the Tax Cuts and Jobs Act capped the combined deduction for state and local taxes (SALT) at $10,000 per year. This means homeowners can deduct a maximum of $10,000 in combined property taxes, state income taxes, and sales taxes. For homeowners in high-tax states, this cap significantly limits the benefit of the property tax deduction.

The mortgage interest deduction applies to loans on a primary residence and one additional property, with a mortgage principal limit of $750,000 (or $1,000,000 under certain conditions). As of 2024, you must have a mortgage balance of at least $750,000 for the deduction to provide substantial tax savings. The deduction is most valuable for homeowners with large mortgages and high income tax rates.

Many taxpayers do not itemize these deductions because the standard deduction is higher. In 2023, the standard deduction was $13,850 for single filers and $27,700 for married couples filing jointly. Unless your itemized deductions exceed these amounts, you receive no tax benefit from itemizing property tax and mortgage interest. Financial advisors recommend calculating both scenarios when preparing your tax return to determine which approach saves you more in taxes.

Practical Takeaway: Understanding whether you benefit more from itemized deductions or the standard deduction requires comparing the two approaches. Consulting with a tax professional or using tax preparation software can help you determine which method reduces your tax burden most effectively.

State and Local Housing Tax Credits: Finding Opportunities in Your Area

Beyond federal tax credits, many states and local governments offer their own housing-related tax credits. These vary widely by location

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