Tax Credits You Can Eventually Take To The Bank
Tax time can be one of the most stressful times of your life, or it can be a time to look forward to having more money come back to you than you ever imagined. Tax credits are the elements that can make the time special for you. A world of credits is out there for you to take advantage of. You just have to know the right credit you can use if you want to take your tax return all the way to the bank.
The following is a list of credits you might qualify for the next time you file your taxes. Make use of all of these credits on your next return, and you could receive a nice lump in your account next year.
Tax Deductions Vs. Tax Credits
The biggest difference between a tax credit and a tax deduction is that the tax credit reduces your tax liability.The tax deduction only reduces the amount of your taxable income and that income figures into your tax liability calculation. In other words, a $1,000 tax credit will reduce your tax obligation by exactly $1,000. In some cases, that reduction will lead to a refund. A tax deduction will not give you the same dollar-for-dollar reduction. It will only remove $1,000 from the total amount of your income that applies to the tax liability. If you earn $50,000 of taxable income in a year, a $1,000 deduction will take that figure down to $49,000, and you'll still have to pay taxes on that. You won't save $1,000. You'll only save a percentage of $1,000. That's why people cherish tax credits for more than they cherish tax deductions. Credits are more likely to land you with a big refund. Both of them will help you in the end, however.
Refundable Vs. Non-Refundable Credits
There are two types of tax credits that you can claim on your income taxes. The first kind of credit is a refundable credit. They're the types of tax credits that most individuals and small business owners love. This is because the tax credits can make their tax liabilities go into the negative. Anything that causes the tax liability to go into the negative is a refund to the taxpayer. The majority of tax credits are non-refundable, however. A non-refundable tax credit is beneficial because it reduces the amount of the tax liability dollar for dollar. For example, your tax liability will be $0 if you receive a $500 tax credit, and you only owe $500 in taxes. A non-refundable tax credit will not go into the negative, however. It will only take your tax liability down to $0. Fortunately, some unused tax credits can be rolled over to the next year.
1. Household Related Tax Credits
The first list of tax credits pertains to credits you can get for yourself or any dependents you might be taking care of. Use them to reduce your tax obligation.
- Earned Income Credit
The beloved EIC or earned income credit is for people who have earnings from a job or business within the year. To earn this credit, you must meet the requirements for people who do not have children, or you must meet the requirements for people who have children. Taxpayers who have children generally have to have paid more than half of those children's expenses for the previous year to qualify. Also, to claim EIC, you must have a filing status of single, head of household, widowed, or married filing jointly. Persons who are filing married separately cannot claim the EIC credit.
For 2020, your investment income must not be any more than 11,000 to qualify for EIC. You must also meet income requirements. If you have no children, your adjusted gross income needs to be lower than $24,210 if you are married filing a joint return and $17,640 if you are single, head of household, or widowed.
The earned income credit amount is up to $600 for a qualifying person who has no children. It's up to $3,955 for people with one child, up to $6,604 for people with two children, and up to $7,430 for people with three children. - Adoption Tax Credit
You might be able to claim up to $15,950 if you adopted a child with special needs before the year ended. To qualify, you have to meet the income requirements. You have the right to claim the full amount if your modified adjusted gross income is less than $239,230. If you earned more, you might still be able to claim a partial credit. Unlike earned income credit, this credit is a non-refundable credit. That means you can only use it if you have a federal tax liability.
- Child Tax Credit
The child tax credit is a refundable credit, which means you may be entitled to a refund even if you do not have a federal tax liability. To qualify for the child tax credit, you must have a qualifying child or children younger than 17 years of age. They all must have social security numbers issued by the Social Security Administration. You can receive a credit if your AGI is lower than $400,000 if you are married or $200,000 if you are single. The credit is up to $2,000 for each child or up to $500 for each dependent who doesn't qualify for the child tax credit. You can only receive up to $1,500 of a refund if you are eligible for one.
- Credit for Elderly and Disabled
You might be able to receive a tax credit of up to $7,500 if you are over 65 years of age and you are on permanent disability. Your adjusted gross income must be under $17,500, and you must meet other criteria, such as having documentation from a medical provider.
- Child and Dependent Care Credit
There's good news if you pay to have someone care for your children while you're at work. You might be able to claim a credit of up to $6,000 if you cared for more than one person and up to $3,000 if you only cared for one person. The credit is non-refundable, which means it will only eliminate your tax liability and will not result in a refund.
2. Educational Tax Credits
The government appreciates families and individuals who are trying to better their educations. Therefore, you might be eligible to receive a tax credit of up to $2,500 if you pay for tuition, books, supplies, and other education-related expenses for yourself or a qualifying person. You must have an income of less than $80,000 per year to qualify for the American Opportunity Tax Credit. This credit is refundable, making it possible for you to receive a refund on your income taxes.
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The Lifetime Learning Credit is another educational credit that you can receive if you are paying expenses for yourself or someone else who qualifies. You must have an adjusted gross income of less than $68,000 if you are single and less than $136,000 if you are married. You will be entitled to a credit of up to $2,000 if you qualify.
3. Health-Related Tax Credits
You have access to tax credits if you purchase health insurance. Here is some information about the most common credit.
Premium Tax Credit
You might be eligible for the refundable premium tax credit if you paid for marketplace healthcare during the year and you fall within the income guidelines. The amount of the premium tax credit can be calculated using form 8962. You will need Form 1095-A to complete 8962 as it will explain to you how much of the premium tax credit you were eligible for or used during the year.
4. Tax Credits for Homeowners
A lot of perks come with being a homeowner. The tax credits are some of the best ones. See if you qualify for any of these special credits.
Residential Energy Efficient Property Credit
The Residential Energy Efficient Property Credit is a non-refundable credit you can take if you've modified your home to make it more energy-efficient. Things like solar panels, fuel cell technology, and geothermal equipment apply. You can take a percentage of the cost for the equipment and installation. The percentage that you can take depends on when you made the modification. The highest amount of your credit will be 30 percent. Therefore, you can take a credit of $3,000 if you installed $10,000 worth of energy-efficient equipment before January 1, 2020, but after December 31, 2016.
Low Income Housing Credit
You can receive a credit if you are an investor who has invested in a property that you made available to low-income individuals. The property must qualify for the program, and you must complete several forms to receive these tax credits.
5. Vehicle-Related Tax Credits
You can obtain a tax credit just for buying a certain type of car. Here's some information about that.
Electric Vehicle Tax Credit
You'll be happy to know that you can get a gigantic tax credit on your return if you purchase an electric vehicle during the year. The electric vehicle tax credit can reduce your tax obligation by up to $7,500. Unfortunately, you won't be able to get a refund because this credit is non-refundable. It might be enough to wipe out your tax obligation, however, and that's good news. Many cars qualify for the credit. Examples of some vehicles you can claim this credit for are the Nissan Leaf, Toyota Prius Prime, and the Chrysler Pacifica Hybrid model.
6. Employment-Related Tax Credits
Some credits will come to you because of your employer. Look over these and see if any of them apply to you.
Excess Social Security and
RRTA Tax Withheld
In some cases, an employer makes an error when it deducts taxes from employee payroll. One year, you might find that the employer has taken too many social security taxes from your check. In that case, you can claim a credit on your return using form 843. You will need to attach some copies of your W-2 form so that the government can make the appropriate deductions for you.
Federal Fuel tax credit
Another credit you might not know about is the federal fuel tax credit. It's for you if you used your vehicle for farm work, or you used to perform business that was off the highway. You might be eligible to take a credit based on the amount of money you spent on the fuel.
Saver's Credit
The saver's credit is a non-refundable tax credit that you might be eligible for if you put savings away into a 401K or IRA plan through your employer. The income limits are between $19,750 and $39,500, depending on which filing status you choose. You would be eligible to take a credit for a percentage of the amount that you put into your plan during the year.
7. Business Tax Credits
You could be eligible for a wealth of tax credits if you own a business. It could be any type of business. These are some of the credits you may be able to claim on your tax return:
General Business Credit
The General Business Credit is a group of more than 20 credits you can take for your business. One example of a credit that falls under the General Business Credit is the Work Opportunity Credit. This credit will be available to your business if you have given work opportunities to people from certain target groups. Those targeted groups include ex-felons, qualified veterans, and vocational rehabilitation referrals. The maximum credit that you can take for each eligible employee is $2,400.
Indian Employment Credit
You can receive tax credits on your return if you have employed workers who are registered Native American Indians. The tax credit is up to $4,000 for each Native American person you hire to work for you. Such people must be officially registered as Native American Indians and must have accessible proof of such registration.
Distilled Spirits Credit
The distilled spirits credit will be beneficial to you if you own a store that sells wine and other such alcoholic beverages. The distilled spirits credit is a calculation based on how much of the items you purchased and stored throughout the year.
Credit for Employer-Provided Childcare Facilities
You could take a credit of up to $150,000 for your business if you provided a center within the business where workers or customers could bring their children. The form you would need to file for this credit is tax form 8882.
Credit for Healthcare Premiums
If you are a small business owner, you could take advantage of the credit for healthcare premiums. You can take a credit of up to 50 percent of the money you spent to provide your employees with health insurance. You must first meet several requirements, however. First, you must have fewer than 25 employees to qualify. You must also pay at least 50 percent of the premium costs. Additionally, you must have an average employee salary of about $55,000 to qualify.
Credit for Disabled Access
You can receive a credit of up to $5,000 on your tax return if you make renovations to your facility so that disabled individuals can have access. This credit is for a small business, however. That means you must have fewer than 30 full-time employees and earnings of less than $1 million during the previous year.
Employee Retention Credit
The employee retention credit is a fairly new credit that focuses on businesses that operated during the pandemic. This is a refundable credit that will allow the employer to take a $5,000 credit for each employee that they retained between March 12, 2020, and January 1, 2021.
Suggestions for Maximizing Your Tax Credits
We want you to get the most from your tax refund the next year you file. Therefore, we feel that you can take some steps that will ensure that you get what you deserve.
A ton of software programs are available for filing your taxes. Those programs have every tax credit programmed into them, and they will help you receives the ones for which you qualify. They will ask you a series of questions that pertain to your possible qualification. You will then receive the credits you qualify for in the end.
Alternatively, you can schedule a consultation with a live tax professional. You may prefer to hear a human voice and have the opportunity to ask the person any questions that come to your mind before that person starts doing your taxes.
Call Us for Additional Help
You can clearly see how you can benefit the next time you file your taxes. It's time for you to put those credits into action and reap their benefits. We're here for you if you need some help filing your taxes or if you need any additional tax tips. We have a heap of information about tax returns, tax payments, income tax filing, and the like. We also have partnerships with a network of tax advocates and advisors.
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Reach out to us and let us know how we can assist you. We'll be delighted to help you.