Extra Credit: Tax Credits and What’s Available
As the year winds down, the last thing anyone wants to think about is tax preparation in Bartonville IL. However, the earlier you start preparing, the better off you’ll be when April rolls around. As such, many people begin to consider the tax deductions they can qualify for, for this year. Additionally, have you also thought of tax credits? Applying for tax credits is another way to lower the taxes you pay for each year. And, in some ways, tax credits can be more beneficial to you than tax deductions.
What Are Tax Credits?
If you are new to tax credits, the quick explanation is they are another way you can save on paying taxes each year. However, they function differently than your typical tax deductions. Tax credits allow individuals, families and businesses to reduce the amount of taxes paid on a dollar-for-dollar basis. Rather, instead of lowering your taxable income (like a deduction), a tax credit reduces the final amount figured in taxes you must pay.
What are the Advantages of Tax Credits?
On the surface, a tax credit doesn’t sound all that different from a tax deduction. Both reduce the amount you must pay in taxes. However, tax credits often can save you much more than a deduction. For example, let’s say you have an AGI (adjusted gross income) of $50,000:
|Tax Deduction Example|
|Adjusted Gross Income||$50,000|
|Applied Tax Rate (20%)||$9,600|
|Tax Credit Example|
|Adjusted Gross Income||$50,000|
|Applied Tax Rate (20%)||$10,000|
Both of these charts use the same AGI and example tax rate. The only difference is between the $2,000 tax deduction and the $2,000 tax credit. In the first chart, with the tax deduction applied towards the AGI, you end up paying $9,600 total in taxes. However, in the second chart, the tax credit added after your taxes are determined lowers the sum you pay to $8,000. Thus, tax credits often save you from paying more in taxes than tax deductions do.
As much money as tax credits can save you in paying in taxes, there is one significant disadvantage they possess in comparison to deductions: most are nonrefundable. For example, if you have a tax credit of $5,000 but only have to pay $3,000 in taxes, you don’t receive a $2,000 refund. However, there are some state or federal tax credits that are refundable, or at least partially refundable.
If either an independent, filing jointly or claiming dependents, there are plenty of tax credits available to apply for. Generally, tax credits are given to those that are benefiting the environment, society or the economy, as an incentive to keep producing and acting in this manner. As such, most tax credits are based around energy savings, caring for children, education, health care, etc. For example, some tax credits include:
- Plug-in Electric Drive Motor Vehicle Credit
- Alternative Fuel Vehicle Refueling Property Credit
- Child Tax Credit
- Child and Dependent Care Credit
- Adoption Tax Credit
- American Opportunity Tax Credit
- Lifetime Learning Credit
- Premium Tax Credit (Affordable Care Act)
- Health Coverage Tax Credit
- Retirement Savers’s Credit
- And More
For each of these credits, there are specific qualifications you must meet to receive them. Otherwise, these credits are always available through your federal and state governments.
How Can You Learn What You Qualify For?
With so many tax credits options open to you, it isn’t always easy to understand what you qualify for. However, with a little help from your local accountant with tax preparation in Bartonville IL, you can start saving on your taxes in no time. Moreover, get in touch with White Income Tax to begin your tax return prep.
Dianna White is one of the leading accountants for the Greater Peoria area. Individuals, families and businesses have all gone to her for help with their financials. White can assist with your tax returns, payrolls, general accounting or other financial needs. And if you think you qualify for certain tax credits or deductions, Dianna can ensure you receive the full compensation you are due.
If you have any questions about your taxes and what tax credits you have available to you, call Dianna White at White Income Tax today. You can contact us at (309) 326-5973. Also, we are located at 431 N Western Ave, Peoria, IL 61606.