Not understanding tax credits is sort of like leaving money on the table. During tax season, personal tax credits can greatly reduce your tax liability. In fact, your tax credits may exceed your tax liability, leading to a bigger refund.
The professionals at Broussard Poché, LLP want to make sure you understand the basics before filing your taxes.
Credit vs. Deduction
What is the difference between a tax deduction and a tax credit? Well, a tax deduction reduces your taxable income. So, when you calculate your tax liability, it’s against a lower amount. It can fluctuate with your tax rate percentage.
A tax credit is a direct reduction of your tax liability. Let’s look at a few common credits.
Common Tax Credits
- Child and Dependent Care Credit
If you have to pay for childcare (or dependent care) while you work or are looking for work, you may be eligible for the child and dependent care credit. You may be able to claim up to 35% of the expenses that you pay for care for a dependent child under the age of 13, a disabled spouse, or a disabled dependent.
- Child Tax Credit
The child tax credit is for parents or caregivers. You may be entitled to take a credit of up to $1,000 per child. A qualifying child is a child, grandchild, stepchild, or foster child under the age of 17 who lives with you for more than half the year and provides less than half of his or her own support.
- Earned Income Credit
The earned income credit is for low-income working taxpayers. It’s only applicable if you work or own a business, and you have earned income during the tax year.
Other tax credits worth asking your CPA about:
- Education credits
- Adoption tax credit
- Tax credit for the elderly or the disabled
- Foreign tax credit
- Tax credit for IRAs and retirement plans
- Energy-efficient credits for vehicles and homes
It’s a good idea to talk with your financial advisor about which tax credits you may qualify for. Ignoring the possibility of credits means you could be throwing money away!