For most taxpayers, paying the least amount of tax possible (while obeying all IRS rules and regulations) is the goal. Tax credits offer a great way of reducing your tax bill to help you owe less at the end of the day.
So, what is a tax credit? Unlike tax deductions, which reduce your amount of taxable income, a tax credit is subtracted from the total tax you owe. That means that tax credits reduce, dollar for dollar, the amount of tax you have to pay!
Many types of tax credits are nonrefundable. These tax credits reduce your tax, but only up to the amount owed. So, if the tax credit is greater than the tax owed, your tax bill is simply zero for that year. The Child Tax Credit is an example of a nonrefundable tax credit.
There are also refundable tax credits. With these types of tax credits, if the credit is greater than the tax owed, you get a refund for the balance. The Earned Income Tax Credit (EITC) is an example of a refundable tax credit.
Tax credits are available for a number of different situations and circumstances. A few examples include:
- Health Coverage Tax Credit (for qualifying low-income taxpayers)
- Adoption Credit (for adoptive parents)
- Lifetime Learning Credit (for qualified education expenses)
- Residential Energy Efficient Property Credit (for certain energy-saving home upgrades)
If you have questions about your eligibility for these (or other) tax credits, need help filing your tax return, or want other tax advice, Taxation Solutions, Inc. is here to put our 40+ years’ experience to work for you. Don’t hesitate to contact our team today!