While Tax credits are generally purposed to encourage us to do certain activities that are good for the economy, they are essentially helpful for us, in every way. If you plan your purchases, you can score great savings with Tax credit, way better than deductions.
Why You shouldn’t Miss Tax Credits?
Compared to deductions and exemptions that reduce tax liability by diminishing the taxable income, Tax credit is more profitable as it cuts tax liability dollar for dollar. This means your tax bill is directly reduced. As such, your federal tax can drop to $0 and even receive a refund when the credit exceeds your total tax debt.
Tax credits can be refundable such as when you owe $1,200 tax while having $1,500 refundable tax credit, you get a $300 refund. Or it can also be non-refundable, that is–it can only reduce your tax debt. For instance, if you claim for $1,500 total of non-refundable tax credit but only owe $1,200 of tax, you have to forfeit the $300 remaining credit balance.
I. Tax Credit for Business
A. Manufacturers’ Energy Efficient Appliance Credit
Your business can cut tax bill by producing energy efficient appliances e.g certain dishwashers, clothes washers and refrigerators. Manufacturers can claim credits on each qualifying appliance multiplied by the applicable amount listed by the IRS.
Manufacturers can only receive an aggregate credit not exceeding $25 million reduced by the amount of the credit allowed to the taxpayer. The credit shall also not exceed an amount equal to 4% of the Average Annual gross receipt of a taxpayer for the 3 consecutive years prior the taxable year.
B. Plug-In Electric Drive Vehicle Credit (IRC 30D)
If you bought or leased a new electric vehicle that draws electricity from plug-in battery, you can claim the Plug-In Electric Drive Vehicle Credit. This credit reduces your tax bill by up to $7,500. it phases out
- The vehicle is not acquired through resale;
- The vehicle is first used by the taxpayer;
- The vehicle is predominantly used in the US.
It is important to note that the IRS may declare that a certain vehicle is no longer qualify for this credit. Also, it phases out for specific manufacturer after they sell 200,000 units.
File Form 8936 to claim for this credit.
C. Research Credit
Business can also claim credits by researches and developments it undertook during the tax year to improve products.
Credit for Increasing Research Activities
Businesses with expenses paid or incurred for qualified research are eligible for tax credit. Only researches that qualify the criteria below are eligible:
- The research is technological in nature
- Its application is for developing a new or improved business component
- Elements of the of experimentation relating to a new or improved function, performance, reliability, or quality.
File Form 6765 to figure the amount and claim this credit. The only business required to file this form are Partnerships and S Corporations. Apart from them all are generally not required to file this form.
Research & Development Expenditures
Small businesses and self employed taxpayers who undertook Research and development (R&D) to improve products are qualified for this tax credit. You can combine qualified R&D expenditures as part of general business credit. This, however is a nonrefundable tax credit.
D. Small Business Health Care Tax Credit
Those small businesses that pay premiums on behalf of the employees for a qualified health plan under the SHOP market are eligible for a tax credit of up to 50% (maximum) of the of premiums paid and 35% for small tax-exempt employers.
- Employers have fewer than 25 full-time equivalent employees
- Employer pays an average wage of no more than $52,000 (tax years 2015 & 2016) a year per full-time equivalent
- Employer pays at least 50% of the health insurance premiums of employees (not dependents or family).
If you have no tax liability for current tax year, you can carry the credit back or forward to other tax years. For small tax-exempt employers, this credit is refundable.
To claim the credit, file Form 8941. For tax exempt employers, write the amount on line 44f of Form 990-T.
II. Tax Credit for Individual Taxpayer
A. Earned Income Tax Credit
The EITC is a refundable credit that allows low to moderate income taxpayers to reduce tax liability. In order to qualify, you must meet certain eligibility requirements e.g you must have earned income within certain limits based on filing status and children and other limits. Even if you have $0 tax liability, you are qualified to claim and get a refund.
To claim, file a tax return and the IRS will then send a letter to notify whether you qualify to claim the credit along with the instructions you need to follow.
B. Child and Dependents Care
If you pay for the care of qualifying dependent or child in order to work or look for a work, you are eligible to claim this credit. The dollar limit is $3,000 for one qualifying individual or $6,000 for two or more. The amount of the claimable credit is between 20% to 35% of work-related expenses paid to care provider, depending on taxpayer’s adjusted gross income (AGI).
The child and dependent must qualify the following criteria:
- A child must be under the age of 13 when the care was provided
- Spouse who is physically or mentally incapable of self-care and lives with for more than half of the year
- Individual who is physically or mentally incapable of self-care and lives with you for more than half a year.
If you you have qualifying child or dependent, file Form 2441; if you received care benefits from employer, complete part III of the same Form.
C. Child Tax Credit
With this credit, you can claim up to $1,000 per qualifying child, and if you cannot claim the full amount of child tax credit, you can claim the refundable additional child tax credit. One good thing about this credit is that you can claim it along with the child and dependent tax credit (listed above) on the same return.
Qualifying child must meet the following requirements:
1) as listed by the IRS, a child is “your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, half brother, half sister, or a descendant of any of them (for example, your grandchild, niece, or nephew)”
2) Age below 17
3) the child does not support half of his/her own needs during the tax year.
4) the child must have lived with you for more than half of the tax year.
5) the child is a US citizen, US national or US resident alien.
Importantly, you should ask a professional help to qualify for this credit as your income and other details must be taken into account. If you qualify, file Form 1040 or 1040A and include the SSN of each qualifying child.
D. Premium Tax Credit
You can claim tax credit if you, your spouse or a dependent purchased health insurance coverage from the Health Insurance Marketplace. To claim, use the information provided on Form 1095-A issued by your marketplace.
To learn more if you qualify click here.
E. Lifetime Learning Credit
You can claim a credit of up to $2,000 per tax return if you paid qualified tuition and fees in an eligible educational institution for you, your spouse or dependents. This include, undergraduate, graduate, professorial degree courses and courses that will improve your job skills.
To claim, you must meet all three requirements:
1) You paid qualified education expenses for higher education;
2) You paid for an eligible student enrolled at an eligible educational institution;
3) The eligible student is yourself, your spouse or a dependent listed on your tax return.
You can claim this credit if your modified adjusted gross income (MAGI) is less than $55,000 (or less than $110,000 if married and filing jointly). A reduced credit is available for single filer who has a MAGI of more than $55,000 and less than $65,000 (or more than $110,000 and less than $130,000 for maried couples filing jointly).
To claim, get Form 1098-T from the school by January 31 and check if the amount written is correct. Then, attach the form with a duly completed Form 8863.
F. Retirement Savings Credit (Saver’s Credit)
Low to moderate income workers can save for retirement while saving on taxes with Saver’s Credit. The credit offsets part of the first $2,000 you voluntarily contributed for your retirement including IRA and 401K plans. The maximum you can claim is $1,000 for single tax filer or $2,000 for married couples filing jointly.
You are eligible to claim saver’s credit if you are:
- Single or married filing separately with income up to $30,500 in 2015.
- Head of the household with income up to $45,750 in 2015.
- Married filing jointly with income up to $61,000 in 2015.
G. First-time homebuyer Credit
If you purchased a home as your main residence between the years 2008 and 2010, you are eligible for a tax credit. You can withdraw up to $10,000 from your IRA, penalty-free.
H. Residential Energy Efficient Property Credit
You can claim up to 30% of your expenditures in installing any of the following energy efficient property:
- qualified solar electric systems;
- qualified solar water heaters;
- qualified fuel cell property;
- qualified small wind energy property; and
- qualified geothermal heat pumps.
I. Plug-in Electric Drive Vehicle Credit
A credit ranging from $2,500 to $7,500 is available for qualified owner of electric vehicle to claim. To check if you are eligible to claim the credit, click here.
Take note of these tax credits and talk to your preparer to know if you are eligible for each. Be vigilant and warned of tax preparer scammers, get informed.
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