As we approach tax season, it’s important to be aware of the various tax credits that may be available to you. Tax credits are a valuable way to reduce your tax liability or even receive a refund. Moreover, there are many different types of credits and tax benefits available depending on your individual circumstances.
In this article, we will explore 10 tax credits that you may qualify for this year, including the Earned Income Tax Credit, Child Tax Credit, and Electric Vehicle Tax Credit, among others.
Understanding these credits and how to qualify for them can help you make the most of your tax return and save you a significant amount of money.
What is a Tax Credit?
A tax credit is a dollar-for-dollar reduction in the amount of tax you owe. Unlike deductions, which reduce your taxable income, tax credits directly reduce the amount of tax you owe, which can result in a larger refund or a lower tax bill.
Basically, tax credits are typically offered by the government as an incentive for certain behaviors or actions, such as investing in renewable energy, purchasing a home, or providing healthcare coverage to employees.
There are many different types of tax credits available, each with its eligibility requirements and maximum amounts. Some tax credits are refundable, meaning that if the credit exceeds the amount of tax owed, the excess can be refunded to the taxpayer.
Others are non-refundable, meaning that they can reduce the amount of tax owed but cannot result in a refund. If you get to know how the tax credit work, then it can help you to make informed decisions.
Understanding Tax Benefits
Tax benefits refer to the various deductions, exemptions, and credits that can help reduce your taxable income and ultimately lower your tax bill. These benefits are typically offered by the government as incentives for certain behaviors or actions, such as investing in retirement accounts, buying a home, or making charitable donations.
Deductions are expenses that can be subtracted from your taxable income, reducing the amount of income subject to tax. Common deductions include mortgage interest, state and local taxes, medical expenses, and charitable donations.
Exemptions refer to a specific amount of income that is not subject to tax. In the past, taxpayers could claim exemptions for themselves, their spouse, and their dependents. However, under recent tax reform, exemptions have been eliminated in favor of an increased standard deduction.
It’s important to keep track of expenses throughout the year and consult with a tax professional or use tax preparation software to ensure you’re taking advantage of all the tax benefits available.
10 Tax Credits that You Must Check for Tax Benefits
Here are the 10 tax credits you must go through this year, 2023, as you might have the potential to qualify for them. So, let’s check them out. Alongside this, do not forget to go through the tax brackets in 2022; it will give a clear idea about the previous and current year.
Earned Income Tax Credit (EITC)
This tax credit is designed to help low-to-moderate-income earners. Eligibility and the amount of the credit depend on income, filing status, and the number of qualifying children. The EITC is a refundable tax credit and provides tax benefits. The maximum credit for the 2021 tax year was $6,728 for families with three or more qualifying children.
Child Tax Credit (CTC)
The Child Tax Credit provides a tax credit of up to $2,000 per qualifying child. Eligibility is based on income and the child’s age. For the 2021 tax year, the credit was fully refundable for eligible taxpayers. Moreover, there is also an additional credit of up to $1,000 per qualifying child under age 6.
American Opportunity Tax Credit (AOTC)
This credit is available to students in their first four years of higher education. The maximum credit is $2,500 per year per student. Now, this is based on tuition, fees, and course materials. The credit is partially refundable, meaning that if the credit exceeds the amount of tax owed, up to $1,000 can be refunded to the taxpayer.
Lifetime Learning Credit (LLC)
The Lifetime Learning Credit is available for undergraduate, graduate, and professional degree courses. The credit is worth up to $2,000 per year. Now, this is non-refundable, meaning that it can reduce the amount of tax owed but cannot result in a refund.
This credit helps low-to-moderate-income individuals save for retirement by providing a tax credit of up to $1,000 for individuals and up to $2,000 for married couples filing jointly. Eligibility is based on income and contributions to qualified retirement plans, such as IRAs and 401(k)s.
Adoption Tax Credit
Families who adopt children can qualify for a tax credit of up to $14,440 per child. Eligibility and the amount of the credit and tax benefits depend on the adoption expenses incurred and the taxpayer’s income.
Residential Energy Efficiency Tax Credit
This credit helps homeowners save money on their energy bills by providing a tax credit for installing energy-efficient systems in their homes. Eligible expenses include installing solar panels, geothermal heat pumps, and wind turbines, among others. The credit is worth up to 26% of the cost of eligible systems and expires at the end of 2023.
Foreign Tax Credit
This credit is available to individuals who have paid foreign taxes on income that is also subject to U.S. taxes. The credit is designed to prevent double taxation of the same income and is limited to the amount of U.S. taxes owed on foreign income.
Small Business Health Care Tax Credit
Small businesses with fewer than 25 employees can qualify for a tax credit of up to 50% of the cost of providing health insurance to their employees. Eligibility is based on the number of employees, the average wage paid, and the cost of health insurance premiums.
Electric Vehicle Tax Credit
This credit is available to individuals who purchase an eligible electric vehicle. The credit is worth up to $7,500. Moreover, it varies depending on the vehicle’s battery capacity and the manufacturer. The credit begins to phase out once the manufacturer sells 200,000 eligible vehicles.
It’s important to note that eligibility for these tax credits can vary based on your specific circumstances. So, it’s always a good idea to consult a tax professional. By taking advantage of available tax credits, you can potentially reduce your tax liability and save money on your taxes in 2023.
While tax deductions can help lower your taxable income, tax credits offer a direct reduction in taxes owed. Also, tax shelters can be used to legally reduce taxable income. However, it’s important to ensure that you comply with tax laws and regulations to avoid steep fines and penalties.
To make the most of these tax-saving strategies, it’s a good idea to consult with a tax professional or use tax preparation software. Thus, to ensure that you’re taking advantage of all the tax benefits available to you. By doing so, you can keep more of your hard-earned money and achieve greater financial security in 2023.