Tax credits are a powerful tool to use when you are trying to reduce the amount of income tax that you owe to the government. There are two kinds of tax credits: non-refundable and refundable. The non-refundable tax credits could help reduce your income tax to zero whereas the refundable credits go a step further in generating a refund.
Tax Credits or Deductions
Gross income is one of the determining factors of your eligibility to benefit from a tax credit. Other factors include age, family size and children. Some tax credits are rewards for energy efficiency or environmental responsibility.
Currently, the following credits are available to qualifying taxpayers:
- Adoption Credit
- Alternative Motor Vehicle Credit
- Child and Dependent Care Credit
- Child Tax Credit
- Earned Income Tax Credit
- Education Credits
- First-time Homebuyer Credit
- Foreign Tax Credit
- Health Coverage Tax Credit
- Making Work Pay Credit
- Mortgage Interest Credit
- Retirement Savings Contribution Credit
- Residential Energy Tax Credits
Tax deductions are not as attractive as these tax credits. A deduction merely reduces the amount of income you need to declare as you figure out the amount of tax you owe. Your adjusted gross income is the basis for your tax responsibility. Instead of searching for tax deductions, multiply your good fortune by seeking out tax credits.
The tax credits are not a deduction from income. Rather, these are a deduction from the tax you owe and this is the reason a tax credit is more valuable than any tax deduction. Tax credits reduce your tax liability penny-for-penny, which is more valuable than simply reducing the amount of income that is taxable.
State of Affairs
Each state handles the treatment of tax credits in their own way. People living in the states that do not have income taxes can take advantage of federal tax credits only. However, people living in states with the highest income tax rates should be looking to minimize their state tax liability as much as possible. State tax credits will be the best way to do this. Again, you must qualify for any tax credit you claim.
On the average, state tax credits are less generous than the federal income tax treatment. Some tax credits are unique to a state and others are percentages of the allowance by the federal government. As an example, a handful of states give a tax credit to persons living in an historic district. Some states have tax credits for weatherization or replacement windows or doors.
Business Tax Credits
More than 3,000 tax credits available that most businesses miss. It is not the fault of the accounting firm or your business Certified Public Accountant (CPA). Each of the fifty states could have approximately 60 unique tax credits for businesses.
There are obviously many more, some based on contributions to community, size of payroll, make-up of employee ethnicity, healthcare, benefits, retirement plans, family flex time and others. Some credits expire and new ones take their place. Tracking all of this action is a mammoth task, which means that only 1 of every 800 businesses will identify and embrace all tax credits for which they are eligible.