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.