Tax Credits – What They Are and How They Can Benefit You

A tax credit is an amount that qualifying taxpayers can claim on their returns that could significantly lower their income tax. In fact, taxpayers who claim them successfully can not only lower their yearly tax bill, but could even increase their refunds. Read on for a clearer idea of the credits for which you could qualify come tax season.

Refundable Tax Credits 

Tax credits are amounts that taxpayers can subtract from the taxes they owe when they file their returns. In most cases, tax credits will lower a person’s taxes only until the amount owed reaches $0. At this point, whether a person gets a refund will depend on whether the tax credits are refundable or not. A refundable tax credit is a credit that goes beyond the $0 limit and still allows any remaining credits to be collected as a refund. Basically, refundable credits go beyond the $0 limit and give taxpayers any remaining credit as a refund. An example of a refundable tax credit is The Earned Income Tax Credit (EITC), which is available to taxpayers who are employed and who earn less than $63,398 a year.

Nonrefundable Tax Credits

 When it comes to nonrefundable tax credits, however, when a taxpayer’s debt reaches $0, then he or she won’t receive any leftover amounts as a refund. Examples of this type of credit include the Child Tax Credit, which reduces a taxpayer’s liability if he or she has a child who is under the age of 17 years old and is being claimed as a dependent.

Some credits are only partially refundable. The American Opportunity Tax Credit, for instance, is available to those who pay education expenses for the first four years of an eligible student’s higher education. When this credit reduces how much a taxpayer owes to $0, then he or she can still receive a refund of 40 percent of any remaining amount of the credit, but only up to $1,000. With this credit, qualifying taxpayers can receive a maximum annual credit of $2,500 per student, with the amount of the credit applying to 100 percent of the first $2,000 of expenses and 25 percent of the next $2,000. To claim the full amount of the credit, the taxpayer in question must have an income of $80,000 or less (or $160,000 for those who are married and filing jointly).

Are You Eligible for Any Tax Credits? 

Tax credits can go a long way towards reducing a person’s tax liability and can even help increase your refund. It can, however, be confusing to know which tax credits your family qualifies for, so if you have questions about your own tax liability and how you can reduce it come tax filing season, don’t hesitate to call CPA, former FBI Special Agent, and experienced nationwide tax return preparation lawyer Ronald Cutler, P.A. at 386-490-9949 for help. You can also set up a meeting with our dedicated legal team by completing one of our online contact forms. Call or contact us online today to get started.

Source: 

irs.gov/newsroom/tax-credits-for-individuals-what-they-are-and-how-they-can-benefit-taxpayers