It's no doubt that as Americans, we pay a lot of taxes. Quite possibly, you recently sent in a check to the Internal Revenue Service (IRS) as part of your annual tax filing process as you had not paid in enough throughout the year. While a tax accountant can offer professional guidance throughout the year to make sure your exemptions and withholdings are as accurate as possible, they can also counsel you on the variety of tax credits and deductions available to taxpayers.
- A tax credit subtracts from the amount of taxes that you owe, and there are two categories of credits:
- A nonrefundable tax credit is when you get a refund only up to the amount you owe. Most tax credits are nonrefundable.
- A refundable tax credit means is when you get a refund, even if it is more than you owe.
In general, tax credits are far more beneficial than tax deductions, as deductions are subtracted from your gross income, whereas tax credits come off the amount of taxes you have due, not your income, and is applied dollar for dollar. Deductions typically only reduce your tax by about 25%.
Credits for individuals are as follows:
- Family and dependent or child care credits
- Income and savings credits
- Homeowner credits
- Health care credits
- Student or education credits
Deductions for individuals are as follows:
- Work related deductions
- Itemized deductions
- Student or education deductions
- Health care deductions
- Investment related deductions
In most cases, tax credits are designed to lend financial assistance to low to moderate income earners.
With all credits and deductions, it is important to do your homework before starting the application process. The IRS.gov website is one of the best resources to understand tax credits and eligibility.
Child care credits
Child care credits are often available for those who care for dependents under the age of 13, or if your spouse or dependent isn't able to care for himself or herself. The credit can be up to 35% of your expenses and in order to qualify, you must pay these expenses so you can attend to your job or seek employment.
You can be eligible for this credit for every qualifying child that you have, but they must be younger than age 17 on December 31. Further, both you and the qualifying child must have a social security number that was assigned on or before the tax due date.
In this case, the child must be your biological child, step-child, adopted child, or a foster child that was placed in your care by an official government agency. If the child has any income of their own, they cannot have provided half or more of their own financial support during the tax year. You must claim the child as a dependent and he/she must be a United States system and must have lived with you for at least six months of the year.
Similar to the earned income tax credit that is outlined below, your income can be rather generous and you can still qualify.
For more information on how to seek child or dependent care credits, please visit this page on the IRS.gov website.
Earned income tax credit
This program was formed in 1975 help offset social security burdens and to entice people to go out and seek employment. Those with low to moderate income may qualify for the Earned Income Tax Credit (EITC). To qualify, certain requirements must be met, and you must file a tax return, even if you do not have any tax owed and even if you are not required to file. The EITC reduces the amount of tax you owe and may even give you a refund.
To qualify for the EITC, you must have earned income by working for someone directly or from running or owning a business or farm. And, the amount of the EITC is designed according to the number of dependents that you have. Your credit will increase with the more dependents you have.
If you have more than $3,500 in investments or investment income, you will not qualify. Further, you must be at least 25 years old and cannot reach age 65 if you do not have dependents. And, you must have resided in the United States for at least six months of the tax year, and no one else can claim you as a dependent on their tax return. Finally, if you are married, you must file a joint tax return with your spouse.
If you have more than $3,500 investment or interest income as of 2018, you won't qualify. You must be at least 25 years old and you can't yet have reached age 65 if you don't have any dependents. You must have lived in the U.S. for at least six months of the tax year, and you can't be claimed as a dependent by any other taxpayer. If you're married, you must file a joint return with your spouse.
For more information on earned income tax credits, please visit this page on the IRS.gov website.
First time homebuyer tax credit
This particular credit emerged during the financial crisis of 2008 to help make buying a home more affordable for Americans. The Housing and Economic Recovery Act (HERA) enabled new home buyers to get a tax credit of up to $7,500 during the first year the credit was made available. In 2009, the credit amount was increased by Congress to $8,000. This credit allowed first-time home buyers to earn a tax credit or a home loan that they would have to repay later.
Unfortunately, this tax credit is no longer available as it ended in 2010, with one major caveat. If you purchased a home as a first-time homebuyer before 2010, you may still be eligible to benefit from the tax initiative. Specifically, you may be eligible if your new home closing took place on or before September 30, 2010.
Electric car tax credit
Financial incentives, including tax credits are available to help lower the up-front costs of plug-in electric vehicles. The IRS tax credit ranges between $2,500 and $7,5000 per new electric car purchased for use and registered in the United States. The size of the car and the battery capacity determine the size of the tax credit. To learn more about specific tax credits for your electric car, visit this website from FuelEconomy.gov.
This program is designed to expire once 200,000 qualified electronic cars have been sold in the United States, per manufacturer. As of this writing, no manufacturers have been phased out of the program.
You may also be eligible for a state-funded credit, depending on where you live. To search laws and regulations relevant to electronic cars, please visit this Alternative Fuels Data Center website.
American opportunity tax credit
Eligible students may be able to take advantage of the American opportunity tax credit for the first four years of college or university. The maximum annual credit is $2,500 per student.
Per this website on IRS.gov, eligibility for this American opportunity tax credit (AOTC) is determined if the student is or has:
- Pursuing a degree or recognized credentials
- Enrolled half time or more for at least one academic period at the beginning of the tax year
- Not yet finished with their first four years of college at the beginning of the tax year
- Not yet claimed the AOTC for the previously named Hope credit for more than four tax years
- No felony drug convictions at the end of the tax year
Solar tax credit
In 2015, Congress approved a federal solar tax credit also previously known as the investment tax credit (ITC). This program, designed to make solar energy more economical. When the ITC was first established, it was set to expire in 2007, and then later in 2015. But, due to the bill passed by Congress in December 2015, the tax credit is now available to homeowners through 2021.
According to EnergySage, here are the specifics of the solar tax credit program:
- Years 2016 – 2019 - The tax credit remains at 30% of the cost of the system. This means that in 2017, you could still get a substantially discounted price for your solar panel system.
- Year 2020: Owners of new residential and commercial solar panel systems can deduct 26% percent of the cost of the system from their taxes.
- Year 2021: Owners of new residential and commercial solar panel systems can deduct 22% of the cost of the system from their taxes.
- Year 2022 and going forward: Owners of new commercial solar energy panel systems can deduct 10% of the cost from their taxes. At this time, it is believed there will be no federal credit for residential solar energy panel systems.
Student tax credit
Parents and students can save thousands of dollars over the course of a college education by taking advantage of the various tax credits and breaks available to them. In addition to the American opportunity tax credit mentioned earlier, you can save on your taxes through these programs:
- Lifetime learning credit – this is for students who have already completed four years of college and are looking to continue and achieve a higher degree. Up to 20% of up to $10,000 of qualified post-secondary expenses paid for a student can be claimed. However, this credit can only be used once per tax return and for a maximum of $2,000. The great news though is that there is no limit to the number of years that you can claim the credit, thus why it is called the lifetime learning credit.
- Loan interest deduction – the student loan interest deduction will lower the amount of your income that you have to pay taxes on. As long as the loan was borrowed to pay for qualified post-secondary expenses, you can likely claim up to $2,500 of interest paid on the loan. This tax credit can be claimed every year until the student loan has been paid in full.
- Tuition and fee deduction – By the end of each January, you should receive a Form 1098-T that will list the amount paid during the previous tax year. This information should be shared with your tax preparer or accountant for use in tax preparation.
Senior tax credit
While getting older can come with its own list of challenges, the IRS does offer a deduction benefit for seniors. If you are single or file as the head of household, you can add an extra amount (this will vary by tax year but was $1,600 in 2018) to the standard deduction that you are otherwise eligible for.
Further, if you are married and file a joint return, you can add a deduction for each spouse who is 65 or older in age. And, you don't both have to have passed your 65th birthday; if just one of you have, you can claim one of these deductions on your return.
Savers credit
This is a credit for people with low to moderate income levels who are making contributions to an eligible retirement plan, such as a 401(k) or individual retirement account. This credit can be worth up to $2,000, though the actual extent is calculated based on a percentage of the contributions and varies based on your income.
When filing your own taxes, be sure to properly educate yourself on the various tax credits and deductions available to you. Believe it or not, every year, thousands of people fail to take advantage of the credits and deductions that are available to them, which means they are giving more money to the government than necessary.
If you do not complete your own taxes, be sure to work with your tax preparer or accountant to ensure your proper deductions and credits are applied. Do not assume that they have you covered. By taking the time to research the options available to you, you can ensure that they too have your best interests at heart. As tax laws change frequently, your financial advisor needs to be on top of the latest to ensure you are not leaving money on the table.
