About 90% of Americans don’t understand basic tax information. That includes their tax bracket and income tax rate.
One of the most confusing things about the tax code is the difference between a tax credit and a tax deduction. They’re not the same thing. How you leverage each could make a huge difference on your tax returns.
What is a tax credit? What tax credits exist that you’re eligible for? Read on to learn the basics of tax credits and how to claim them on your tax return.
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What Is a Tax Credit?
A tax credit is a dollar-for-dollar credit towards the amount of tax you owe.
How does that compare to a deduction? A deduction is subtracted from your income. It does lower your tax liability, but it doesn’t have the power that a tax credit does.
Let’s say that you earn $75,000 a year and unmarried. Your income tax bracket is 22%. You would owe $16,500 in taxes before deductions.
If you take deductions worth $10,000 your taxable income is $65,000. You’d still be in the same tax bracket, taxed at 22%. Since your taxable income is lower, your tax bill drops to $14,300.
A tax credit works differently. Using the same example, a $10,000 tax credit is applied to the amount of tax you owe. Instead of owing $16,500, you’d only owe $6,500.
Types of Tax Credits
There are three types of tax credits: refundable, nonrefundable, and partially refundable.
What is a nonrefundable tax credit? It means that you can use the tax credit until your tax bill is zero. If your tax bill is $17,000 and you have a $20,000 tax credit, you won’t get a $3,000 tax refund.
You will get a refund with a refundable tax credit, however. Some tax credits are partially refundable, depending on the amount and the tax credit.
Available Tax Credits
Once you realize what a tax credit does to your tax bill, you want to take advantage of as many as possible. One of the most common is the Earned Income Tax Credit. This is a refundable tax credit based on income.
There’s also the Premium Tax Credit, which is part of the Affordable Care Act. This is also a refundable tax credit to help you offset the costs of health care coverage.
The Solar Tax Credit allows taxpayers to receive a tax credit of up to 26% of a qualified solar installation. This is a nonrefundable tax credit.
You can learn more about solar tax credits at https://blueravensolar.com/colorado/solar-panel-installers-fort-collins/.
There are still plenty of advantages of the solar tax credit. It can be applied to your taxes for the previous year and for the next 20 years. For instance, you only use $3,000 of a $15,000 tax credit. You can apply the remaining $12,000 to future tax bills for the next 20 years.
What Is a Federal Tax Credit?
What is a tax credit? It’s a simple way to lower the amount of money you owe on taxes. There are many tax credits available and you should work with a tax professional to ensure you take advantage of the ones you’re eligible for.
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