For many people, tax season is a time of dread. However, it doesn’t have to be that way! By understanding the different types of tax credits available and proper tax planning, you can reduce the amount of taxes you have to pay and increase your chances of getting a tax refund.
Tax Credits can be used to offset the cost of your taxes owed to the Internal Revenue Service (IRS). These credits may be in the form of discounts or recognition for taxes you have already paid. In general, a credit will allow you to reduce your state tax liability by the amount you are credited. There are two kinds of tax credits – personal tax credits and business tax credits.
What is a tax credit?
A tax credit is a reduction in the amount of taxes you owe the government. This reduction is made by subtracting your actual expenses from your taxable income. As a result, your tax bill will be lower by a certain percentage, but you must make sure that you qualify for the tax credit.
Different varieties of tax credits
- Refundable tax credits are paid out in full. As a result, the credit can reduce the amount of tax owed to zero, reducing your tax liability. One example of a refundable credit is the premium tax credit, which allows a person to receive credit for the amount they paid in healthcare premiums purchased in the insurance marketplace.
- A nonrefundable tax credit can be carried back up to twenty years, but can only be used to offset the amount of tax owed. Nonrefundable tax credits can not bring your taxable amount past zero dollars and they do not translate to the IRS owing you money, nor would they result in a refund check.
- Partially refundable tax credits can include credits like the American Opportunity Tax Credit (AOTC). These credits are different because if you qualify for only part of the credit, you may take the rest in cash.
How does a tax credit affect your tax liability?
A tax credit is an amount that can be subtracted from the total amount of taxes that a person owes – Tax credits are more advantageous than tax deductions because they reduce your taxable income dollar-for-dollar. A deduction will lower your final tax liability in a certain tax bracket (e.g., the 22% tax bracket), but a tax credit will cut your tax bill by the full dollar. There are three basic categories of tax credits: nonrefundable, refundable, and partially refundable.
Tax credits are a great way to lower your tax bill and help you get the most out of your money. Whether you’re in the business or in the private sector, tax credits can reduce the amount you pay. The amount you save could be hundreds or thousands of dollars.
Read more about the importance of tax planning if you own a small business.
How does a tax credit differ from a tax deduction?
When it comes to tax savings, tax credits and deductions can make the difference. Generally, a tax credit reduces your taxable income by a specific dollar amount. A tax deduction, however, reduces your tax liability by a different dollar amount, depending on your marginal tax rate.
For instance, if you pay 10% in tax, your deduction will only amount to about $100.
Tax credits reduce your total tax bill, while tax deductions reduce the overall amount of income you pay before applying the tax rate. This makes tax credits more valuable to most taxpayers. However, you don’t need to itemize deductions to qualify for these credits. In fact, tax credits can save you more money than tax deductions.
Why do we have tax credits?
Tax credits are one of the many ways that the government tries to encourage taxpayers to do things that are beneficial to society, like going to college, owning a home, or adopting a child. By reducing a person’s tax liability, tax credits make these activities more affordable and thus more likely to happen. The hope is that by incentivizing certain behavior through tax breaks, the government can encourage more of them.
One common tax credit is the child tax credit. If you have a child under the age of eighteen, you can claim a credit of up to $2,000 for each child. However, it is important to note that this credit has an income limit and phaseout rate.
Tax credits can be used as tax relief for many purposes. For example, you can take advantage of the Energy Efficiency & Renewable Energy Tax Credit for buying an electric car or solar panels. By incentivizing things like energy efficiency, it is a win-win for taxpayers! A tax credit can reduce your tax owed to zero, while a tax deduction only reduces your tax liability.
Personal tax credits
Personal tax credits are money that you can take directly out of your taxes, and this money can reduce your tax bill. Unlike tax deductions, however, which reduce your tax bill by a certain percentage, tax credits have the same value for every taxpayer.
Maximizing your personal tax credits
The best way to maximize the tax credit for your personal situation is to seek professional help. Many tax professionals specialize in tax planning and can help you navigate the confusing tax laws.
In addition to providing tax preparation services, experts like Joseph Damiens and his team will be able to advise you on the best way to maximize your tax return. While tax preparation season can be especially hectic around April 15th, the best way to ensure you get the most benefit from tax planning is to work with a tax professional.
Common personal tax credits
- The Child Tax Credit/Additional Child Tax Credit
- Nonrefundable Education Credits
- Refundable American Opportunity Credit
- Retirement Savings Contributions Credit
- Foreign Tax Credit
- Child Care Credit
- Elderly/Disabled Credit
You can visit the Internal Revenue Service (IRS) website for more information on what tax credits are available.
Business tax credits
Business tax credits can be valuable for a variety of business activities, and they can reduce your taxable income. These credits can be generated through various activities, such as hiring certain classes of employees or using certain resources in the manufacturing process. It is possible to build up a surplus of these credits, and it’s important to know how to convert them into cash.
Business tax credits are a great incentive for small businesses, but many people mistakenly confuse them with business tax deductions. While business tax deductions lower your taxable income, business tax credits can lower your tax bill by as much as $1,000. In order to qualify, you must take a specific form for each credit.
Common business tax credits
- Credit for Small Business Health Insurance Premiums
- Employee Retention Tax Credit (ERC)
- Employer Credit for Paid Family and Medical Leave
- Energy Efficiency & Renewable Energy Credit
- Work Opportunity Credit
- Disabled Access Credit
- General Business Credit
How to find the tax credit you are eligible for
When filing your taxes, you’ll need to understand all the tax credits that are available to you. The IRS has a number of publications and website resources that outline what you may be eligible for and how to find them. If you’re unsure about what your options are, it’s a good idea to speak with a tax professional, like Joseph Damiens. They can help you maximize your tax credits and deductions.
You can apply for a tax credit to help save money on the premium for your health insurance plan. The amount you receive is based on your income estimate and household information. If you earn between 100% and 400% of the federal poverty level (FPL), you may qualify to receive this credit. You can even qualify for a special enrollment period if your income is under 150% FPL.
Earned Income Tax Credit (EITC)
A popular tax credit is the Earned Income Tax Credit (EITC). The EITC is a federal tax break available to people with low to moderate income. The EITC will save money on your tax bill or even eliminate it altogether. Eligible individuals can receive up to six-hundred dollars in EITC refunds. To claim the EITC, you must file your federal and state tax returns.
If you are eligible for the EITC, you can claim credits up to $6,728 towards your taxes. The chart below provides an overview of eligibility. For those who are eligible, filling out your tax forms accurately can help you get the maximum refund. The EITC is available to taxpayers who earn less than $72,000 per year.
How to claim federal tax credits
The process is actually quite simple. First, gather all the necessary documentation. This includes income statements, receipts for any eligible expenses, and your social security number.
Next, fill out the appropriate forms. The IRS website has a handy tool that can help you determine which forms you need to complete. Once you have everything in order, sent it off to the IRS via mail or e-file. And that’s it!
Claiming federal tax credits doesn’t have to be a headache. Just be sure to stay organized and keep track of all your documents. Otherwise, you might find yourself owing the government a lot of money come tax season.
Get started tax planning today!
When it comes to taxes, there’s no such thing as too much planning. An experienced tax attorney can help you navigate the complicated tax code and claim credits that can save you a lot of money on your tax liability. With careful planning, you can minimize your tax burden and maximize your chances of a successful outcome come tax season.
So don’t wait until it’s too late – consult an experienced tax attorney, like Joseph Damiens today, and start planning for a bright future.
Contact us online or call (601) 957-9672 to schedule a free consultation.