Are You Overlooking These Valuable Tax Credits?

Are You Overlooking These Valuable Tax Credits?

Tuesday, 24 September 2019 18:25

No one wants to pay more in income taxes than they have to! The good news is that tax credits are one of the most powerful ways to lower your burden. How are credits different from deductions - and which ones should you keep in mind as you prepare your filing? Let’s find out.

Tax Deductions vs. Tax Credits 

A tax deduction lowers your taxable income based on your tax bracket. Say that you are in the 24% bracket: a dedication valued at $1000 will lower your taxable income by $240.

A tax credit lowers the amount of tax you owe, providing you with a dollar-for-dollar reduction in your tax liability. So, for example, if you have a credit worth $1000, it lowers your tax bill by $1000. Simple enough! 

Tax credits can be nonrefundable. If your credit lowers your tax bill below zero, you do not get a refund. Let’s put that $1000 credit to work as an example. If your tax bill is $500, you don’t get a $500 refund.

Other credits, such as the Child Tax Credit and Earned Income Tax Credit, are refundable. If the credit is valued beyond what you owe, then you may receive a refund.

Common Tax Credits 

As you prepare to file or gather materials to bring to your financial professional, consider the following common - and valuable - tax credits.

  • Child Tax Credit. If you have children under the age of 17, you may be eligible for a credit of up to $1000 for each child. Previously, the Child Tax Credit was completely refundable: as of 2018, it is refundable for up to $1400. For example, if your tax bill is $0, you may receive a refund of $1400, regardless of how many children you claim. 
  • Dependent Care Tax Credit. If you have children under age 13 or certain other dependents, you may qualify for this credit. This is nonrefundable.
  • Education Credits. You may be eligible to receive tax credits for qualified college and vocational school expenses. The American Opportunity Tax Credit allows you to claim up to $2500 per student for tuition and fees paid during four years of post-secondary education. Up to 40% of this is refundable. 

The Lifetime Learning Credit allows you to claim up to $2000 per family for expenses related to post-secondary education and expenses needed to improve or acquire job skills. This is not refundable.

  • Earned Income Tax Credit. This tax credit is income dependent and the value is determined by the amount of your earned income (wages/self-employment income), investment income, and filing status. If you have qualifying children, it can increase the credit. The EIC is refundable. 
  • Business credits. If you own a business, you may qualify for a number of credits, including: the Research Credit, Work Opportunity Credit (nonrefundable), Disabled Access Credit, and Low-Income Housing Credit. These are nonrefundable. 

Don’t overlook these and other valuable tax credits. They can reduce your taxes - and in some cases, net you a refund. We are happy to help you determine which tax credits apply to your situation. Contact us for more information or to schedule an appointment.