Multiple transparent and hidden strategies to receive a tax credit are available. Learn how to get more back from income tax credit today.
Many people dread filing taxes because they fear having to pay more of their hard-earned money to the Internal Revenue Service (IRS). The truth is, however, both transparent and hidden opportunities to receive a tax credit are available. Knowing how to get more back from income tax credit helps make filing taxes a positive experience with financial benefits for you and your household.
Your filing status impacts your credit amount. The number of dependents you claim also influences how much of a credit you receive. Filing and claiming these two aspects correctly on your tax return is only the beginning of how to increase your credit amount. Continue reading to learn how to get more back from income tax credit today.
What Is an Income Tax Credit?
An income tax credit is different from a tax refund and therefore worthy of an extended explanation. Income tax credit essentially offsets your total tax liability by subtracting a credited sum from your total payable tax amount. Income tax credits are also different from deductions. Deductions apply indirectly by lowering the base taxable amount earned by the filer. Tax credits, however, lower the filer’s amount of liability regardless of his or her base tax liability.
Various types of tax credits are available. An income tax credit is perhaps the most popular type of credit offered. Income, Child, child and independent care, education, saver’s energy-saving and foreign tax credits are also available. Below is a brief description of each type of available tax credit.
Income Tax Credit
An income tax credit is also referred to as an Earned Income Credit (EIC). This type of tax credit is available to individual and family filers with low through moderate household income. Essentially, income tax credits are deducted off the top of the payable tax amount once calculated. Your EIC might also increase your tax refund amount depending on your filing circumstances. Please note: EIC protocols are different for members of the clergy and U.S. military branches. For more information please refer to the appropriate IRS website page here.
Child Tax Credit
This type of credit is designed to reduce the tax burdens of families with qualifying children in their households. Claiming a Child Tax Credit is even possible for non-filers under qualifying circumstances. Receiving this credit is dependent upon meeting all applicable criteria and is available for every qualifying child who possesses a U.S. Social Security number and is employable in the U.S. as well.
Child and Independent Care Credit
A Child and Independent Care Credit is available to qualifying filers who pay a childcare worker or establishment to care for their child or children, so they are able to either go to or search for work. Qualifying children must commonly be younger than thirteen years of age and be your dependents. This type of credit also applies to filers who pay an outside individual or agency to care for their spouse or other dependent who is incapable of caring for himself or herself.
Education Tax Credit
This credit helps pay for the costs of post-secondary education. By design, the Education Tax Credit benefits qualifying parents and students alike. Tuition and applicable enrollment fees are also commonly eligible to be claimed. The Education Tax Credit is also referred to as the Hope Credit. The credit is targeted at the first two years of post-secondary education costs. Qualifying students must be enrolled for a minimum of half the time.
Savers Tax Credit
The Saver’s Tax Credit is available to qualified filers earning low through moderate incomes. It is designed to help these filers save up for retirement. Contributing to an IRA, a 401(k) or other workplace retirement plan is part of the qualifying criteria. The Saver’s Tax Credit is also referred to as the retirement savings contributions credit and is made available to qualifying filers in addition to all other applicable tax credits, deductions, and savings.
Energy-Savings Tax Credit
The Energy-Savings Tax Credit is applied pursuant to the energy-saving improvements make on your primary residence. This credit is capped at five hundred dollars, with additional credit limitation applied on a per-item and/or per-improvement basis. The Energy-Savings Tax Credit applies to energy-efficient insulation, exterior doors, windows, heat pumps, water boilers and central air conditioning systems. A thirty-percent credit is also applying to fuel cell solar water heating and photovoltaic properties.
Foreign Tax Credit
A Foreign Tax Credit is available to filers who paid accrued foreign taxes to a foreign country or U.S. possession. This credit applies only to U.S. income tax on the same exact income. The option to take this credit or apply an itemized deduction based on the accrued foreign taxes you paid is also available. Please note: Additional credits might also be available to homeowners and filers who paid for qualified healthcare expenses.
How to Calculate Your Tax Credits on Your Tax Returns
The first step to calculating your total tax credit amount is to know which credits you are qualified to receive. Once this information is assessed, fill out your tax return information using Form 1040 and any applicable worksheets. Calculate your adjusted gross income (AGI) or your modified adjusted gross income (MAGI) as applicable, as most tax credits are reliant upon this number when applied. Next, fill out each form as appropriate for each type of tax credit available to you. For example, to receive the Child Tax Credit you will need to complete Schedule 8812. The IRS website includes pages dedicated to each type of tax credit, how to file and what forms to use. Each form also includes a worksheet to help you calculate your tax credit amounts.
Various tax credit calculators are available online to assist you. The Taxpayer Advocate Service (facilitated by the IRS) provides a Premium Tax Credit Change Estimator. Additional tax credit calculators available online today include:
EIC Calculator via TaxOutreach.org.
Vero Skatt Foreign Tax Calculator.
TurboTax Residential Solar Energy Calculator.
Additional Information on Tax Credits and Filing
Filing single versus married impacts your refund and tax credit amounts. It is vital to assess the benefits and drawbacks of filing as one or the other. Make your decision based on what is best for your household. Claiming dependents also impacts your refund and tax credit amounts.