If you were hit with a massive income tax bill last year, you might look into other ways to reduce your tax burden and appease Uncle Sam.
Tax credits can directly reduce the amount of taxes you owe and significantly lower your overall tax bill to save you money.
Let’s take a closer look at the different types of tax credits and how you can qualify for them.
What are tax credits?
When it comes to filing your taxes, tax credits can lower the amount of money you owe to the IRS. Tax credits are dollar-for-dollar reductions, meaning if you owe $5,000 in taxes and have a $2,000 tax credit, you’d only owe $3,000.
The government designs tax credits to reward investments that benefit the economy, the environment, and good causes. To qualify for a tax credit, you must meet specific requirements.
Tax Credits vs. Tax Deductions
While tax deductions and tax credits both help you lower what you owe, they work in different ways.
Deductions
Deductions reduce the part of your income that gets taxed. For example, if you earned $50,000 but have $10,000 in deductions (from things like mortgage payments, charitable contributions, and student loan payments), the government will only tax you on $40,000 instead of the full $50,000.
Tax Credits
On the other hand, tax credits directly reduce the amount of tax you owe. If you owe $5,000 in taxes and have a $1,000 tax credit, your tax bill goes down to $4,000. Since credits cut your tax bill dollar-for-dollar, they usually save you more money than deductions, which only reduce the amount of income that’s taxed.
Another thing to note is that tax credits don’t hinge on your tax brackets, so whether you’re in a higher or lower bracket, it still reduces the same amount.
Types of Tax Credits
Nonrefundable Tax Credit
If you earned a $5000 nonrefundable tax credit and owe $4000 in taxes, this credit will zero out what you owe, but you won’t get the extra $1000 back as a refund.
Examples of nonrefundable tax credits include:
Saver’s credit
Foreign tax credit (FTC)
Lifetime learning credit (LLC)
Elderly or disabled credit
Adoption credit
Mortgage interest tax credit
General business credit (GBC)
Residential energy efficient property credit
Credit for holders of tax credit bonds
Alternative motor vehicle credit
Refundable Tax Credit
In this case, if you receive a tax credit of $5000 and owe $4000 in taxes, the credit will not only zero out what you owe, but you’ll also receive a $1,000 refund.
Here are some examples of refundable tax credits:
Earned Income Tax Credit (EITC)
Child Tax Credit (partially refundable)
American Opportunity Tax Credit (partially refundable)
Premium Tax Credit
Fuel Tax Credit
Which Tax Credits Do I Qualify For?
According to the IRS, you can qualify for the following tax credits if you meet the requirements. For more specific information on how to qualify, make sure to check the IRS website or meet with a tax advisor.
Earned Income Tax Credit (EITC)
- You can qualify if you are considered a low-to-middle-income household according to your tax bracket and income.
The more children you have, the higher the potential amount you receive.
Parents & Caretakers
If you’re a parent or caretaker, you can qualify for the following tax credits:
Child Tax Credit: If you have children or other dependents who are under the age of 17, provide less than half of their support for the tax year, and have lived with you for more than half of the tax year, you may qualify.
Adoption Credit: This credit is for caretakers of adopted children under 18 years old who are either physically or mentally unable to care for themselves, including special needs children.
Child and Dependent Care Credit: You may qualify if you paid someone to care for your child.
Higher Education
There are two types of education credits available for those who pay for education expenses. If you, your spouse, or a dependent are enrolled, you could qualify for these credits.
American Opportunity Tax Credit (AOTC)
Lifetime Learning Credit (LLC)
Saver’s Credit
If you contribute to your IRA or employer-sponsored retirement plan, you may be eligible for Saver’s Credit. The amount you get back depends on how much you earn yearly and how much you contribute to your retirement account.
Clean Vehicles & Clean Home Energy
You can qualify by purchasing an electric or hybrid vehicle or investing in any of the following clean home energy updates:
Central air conditioners, water heaters, furnaces, boilers and heat pumps
Exterior doors, windows, skylights, and insulation materials
Solar, wind, and geothermal power generation
Biomass stoves and boilers
Home energy audits
Solar water heaters
Fuel cells
Battery storage
Marketplace Health Insurance
Under the Affordable Care Act, health insurance is available for those not covered by their employers. If you purchase health insurance on the Health Insurance Marketplace rather than through a government program such as Medicare or Medicaid, you may qualify.
Find Out if You Qualify for Tax Credits
Discovering your eligibility for tax credits can save you money and reduce your overall tax burden. Let us help you wade through the details and find out if you qualify for tax credits.
Reach out to one of the professional tax advisors at AMG Finance today to take advantage of the credits available to you.
