If you’re like most, then taxes are probably not your favorite thing in the world. But at the end of the year it’s always good to make sure that you don’t miss out on any deductions or credits – because let’s face it, money is tight and every dollar counts.
In this article we will go over 10 different tax credits that you may be able to claim in order to reduce your taxable income, and therefore the amount of taxes you owe. These include credits for charitable giving, education expenses, child care, retirement savings accounts and more and even better these are eligible for individuals and small business.
My name is Mike Habib and I’m here to tell you about tax credits for this year that can help save you some money. Whether you’re a freelancer, an employee with overtime hours, or just someone who wants to report losses from investments- there are plenty of ways for Americans to take advantage of what they deserve. So if you have questions about whether one credit applies to your situation we’ll cover it all in this article.
What is a tax credit, and does it overlap with a deduction or exemption?
The first step is to establish a firm beginning. You already know that tax credits, exemptions, and deductions are all crucial when determining how much you owe in taxes. But what distinguishes them from one another? A tax credit is something that reduces your taxable income. Every qualifying credit will have a corresponding dollar amount, and this number is deducted directly from the taxes you owe.
To clarify, deductions reduce how much taxable income you have to begin with – effectively lowering the amount of money taxed. For example if your taxable income is $50,000 then a
- A tax credit is a dollar amount subtracted from the amount you owe in order to reduce your taxes. To put it another way, if a tax credit is $500, that means you will pay $500 less in taxes.
- Tax credits and exemptions: In contrast, deductions and exemptions only reduce your taxable income. An exemption lowers your taxable income to the same extent as a deduction does, but it has fewer stipulations about how it may be claimed.
Tax credits are frequently regarded as superior to deductions or exemptions since they can be used in conjunction with one another. The wonderful news is that, as long as you’re sure you qualify, you may use any and all of these tax breaks at the same time. The more, the better. There are several federal tax credits available to assist taxpayers—particularly those in middle-income and low-income brackets—reduce the amount of taxes they owe or receive the maximum refund possible. Here are 5 of the most significant tax credits you might qualify for that will have a major impact on your income and tax situation.
When can you claim a tax credit?
One of the most frustrating things about filing your taxes is that you must qualify for each deduction or credit before you’re allowed to use it. It can be difficult to know if something applies to your situation, especially when there are so many rules and stipulations! To make matters even more complicated, some deductions or exemptions pertain to certain situations- not just the general public.
So what should you do if you want to claim a deduction or credit that you’re not sure about? Well, you can definitely spend hours researching each one online and trying to find out. Alternatively, if you have other things on your plate you might just want someone else to do it for you. That’s why so many people choose to hire a tax preparer/ EA, Attorney, CPA, they don’t want the hassle of doing it themselves, and they trust an expert to handle their business.
Tax credits to look out for
- Earned Income Tax Credit (EITC)
People who work but still make low to moderate salaries may qualify for the Earned Income Tax Credit, which is a tax break. Whether or not you qualify for the EITC tax credit will be determined by a variety of criteria, but it begins with determining if you are considered poor or modest by the government. The number that qualifies as a qualifying.
The amount of this credit is unpredictable and will vary considerably based on the requirements listed above. The credit can range from $500 for single parents without children to over $6,000 for families with three or more kids, as a rough guide.
- Work Opportunity Tax Credit
If you hire individuals from a group that historically has faced employment barriers, you may qualify for the WOTC. Veterans, persons with impairments, and ex-felons are examples of this sort of targeted group.
The amount of this credit will be determined based on the employee’s salary, time worked, and to which targeted group the employee belongs. The most generous employers get a maximum credit of $2,400 per worker. This one takes a little more legwork on your part. To verify that the employee belongs to a targeted group, you must file Form 8850 with your state agency within 28 days of when he or she starts working for you. Then, depending on your sources of income, you’ll file this credit on Form 1040 as either a form 3800.
- Employer-Provided Childcare Facilities and Services are not eligible for this credit.
If you are an employer who provides childcare services for your workers on-site or via a contract or referral program with an outside provider, you may be eligible for this child tax credit. The credit is 25% of the cost of childcare expenditures (for things like building and maintaining the facility), as well as 10% of the money paid to provide childcare. There are several restrictions and conditions to fulfill in order to claim this credit. Make sure your CPA, Attorney, EA checks that you’ve got it right.
- Child and Dependent Care Credit
This is a credit you’ll report on your taxes as an individual, but one that you should never overlook. You may qualify for the Child and Dependent Care Credit if you pay for childcare or dependent care (for a spouse or other dependent who can’t care for him/herself) while working or looking for work.
The IRS has put up a wealth of information to assist you determine whether or not you qualify for this childcare tax credit, including criteria, flowcharts, and questions. The childcare credit is worth 20-35% of your childcare expenditures up to $3,000 per youngster, with a maximum credit of $6,000 per family.
- Credit for Small Employer Health Insurance Premiums
You run a firm with fewer than 25 full-time workers. You pay an average wage of less than $51,600 per year. You contribute at least half of the cost of your employees’ health insurance premiums. Small Business Health Options Marketplace has allowed you to purchase your insurance plans. You may claim this credit if you paid 50% of your premiums (55% if your company is tax-exempt). You can only qualify for this credit for two years in a row.
- The Premium Tax Credit
Another overlooked individual credit is the Premium Tax Credit. You may get this credit if you bought your own health insurance through the Health Insurance Marketplace. The amount of the credit varies greatly based on your income and location. This document from the Center on Budget and Policy Priorities contains detailed examples as well as answers to commonly asked questions.
The most important thing to remember about the premium tax credit is that it’s refundable, meaning you can claim it even if you don’t owe any taxes. This is an important distinction because many taxpayers fail to file for these credits, which allows them to miss out on thousands of dollars.
- Retirement Plan Startup Costs Tax Credit
If you’re a small business owner with employees who want to start a retirement plan, the IRS will reimburse part of the “ordinary and necessary” expenses involved. If you have 100 or fewer workers, you may qualify for this credit if you fulfill certain conditions. This credit is available for the first three years after you begin a company-sponsored retirement plan. This credit is worth 50% of your startup costs up to $500 per year. Verify that you qualify, and if you don’t for the previous year, contact your EA, Attorney, CPA about starting up a retirement plan next year. Why? You may claim this credit in the tax year before your plan goes into effect.
- Plug-In Electric Drive Vehicle Credit
If you bought an electric car, including passenger cars and light trucks, for business use, you may be eligible for the Plug-in Electric Drive Vehicle Credit. This is also often known as the alternative motor vehicle credit. Depending on the vehicle you’ve purchased, your credit could be worth anywhere from $2,500 to $7,500.
- Research and Development Tax Credit
If you incurred qualified research and development costs in the United States, you may be eligible for the Research & Development Tax Credit. This is also known as the R&D Tax Credit. To be qualified, you must have less than $5 million in gross receipts during the credit year and less than five years of gross sales. The federal R & D Tax Credit may be worth up to $1.25 million (or $250,000 each year for up to five years) if your credit qualifies.
- American Opportunity Tax Credit
For years, the Hope Credit has helped pay for higher education expenses. Since 2009, the credit has been renamed and adjusted as the American Opportunity Tax Credit. The American Opportunity Tax Credit (AOTC) is a tax credit that allows people who pay taxes to deduct up to $2,500 per year for four years of post-secondary education. Individuals whose MAGI is less than $80,000 or $160,000 for married couples filing jointly may claim the whole amount. You may get up to a 40% refund with your tax return if your credit is greater than the total taxes you owe.
Small-business tax credits
The government also awards small-business tax credits to businesses that engage in certain types of activities that are helpful to the economy or society as a whole. People often confuse tax credits with tax deductions, but they are not the same thing.
Companies can claim tax deductions for most ordinary and necessary business expenses. There are also specialized deductions, such as deductions for home-based businesses. Deductions decrease your taxable income, as well as the tax bracket that you fall into if you report business income on your personal tax return.
How to claim small-business tax credits
The maximum credit you can receive for your small business is $3,000. If this amount isn’t enough to cover all the taxes owed on one return or multiple returns filed by yourself and employees with their own earnings below some threshold (currently 25%), be sure submit IRS Form 3800 – it will list each eligible tax break that may apply to both personal income as well as any wages paid out in 2009 if applicable.
The small-business accounts for tax credit is a great way for your business to grow. This formula will help you know how much of it, though there’s a limit on what can be claimed each year and this limit determined by using these three things:
1) Your net income from profits (whether they come in cash or not);
2), Alternative minimum tax if applicable.
3). Subtract 25% multiplied by either amount greater than $25k if that was just regular liability won’t apply here but then again maybe next year as well.
You can take a number of tax credits as an individual, but each one requires its own form. On Form 3800 you’ll add up all your receipts from working with companies in order to calculate the total value for any such credit – if only eligible for 1 small-business related deduction then there’s no need submit this form! You should instead file what comes along with that specific line item:
1. Credit for Employer-Provided Childcare Facilities and Services (Form 8882)
This tax credit targets businesses that pay for their employees’ childcare expenses or help their employees obtain childcare.
The following expenses are covered by the Employer-Provided Child Care Tax Credit:
Expenses can add up quickly when running a childcare facility. This is because there are many kinds of expenses that you need to keep track of, such as caregiver salaries and supplies for the children in your program or even outsource them through contracts with qualified providers who offer their services on site at reasonable rates like nannies/aides etc., which will then help lower costs significantly!
2. Alternative motor vehicle, electric vehicle and alternative fuel credits
The IRS offers several tax credits related to alternative energy use. If you produce or use a fuel in business, like solar power for example and it helps decrease carbon emissions then there’s probably an eligible credit waiting just for YOU!
The most popular of these is called the “green” industries program which has provided $2 billion over four years through 2020 as well as providing grants up front so companies don’t need all their revenue before getting paid back by taxpayers… but wait there’s more I’m not done yet either because who doesn’t want free money right? Well if that really isn’t enough than how does 5 million dollars sound per year- funded entirely with your own taxes.
In order for an alternative fuel vehicle to be used as a transportation method, it needs more than just good looks and green credentials. There are many credits which can help you recover some of your investment in these vehicles from taxes! The first thing that may come up on tax season is the Biofuel Producer Credit Form 6478 (worth $1 per gallon) if at least 10% of production was dedicated towards renewable energies this year; or qualify for Investment Tax Credits by rehabilitating old equipment and using electric power.
3.Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips (Form 8846)
When you work in the food and beverage industry, it is important to keep track of how much money your customers leave behind for tips. If employees receive any gratuities from their patrons (whether through service charges on bills or just by leaving cash), then those amounts are subject not only to tax but also social security payroll taxes – which can result in a credit worth up to an equivalent amount paid out as employer contributions made regarding these wages!
4.Tax Credit for Small Employer Pension Plan Startup Costs and Auto-Enrollment (Form 8881)
The tax credit helps to lower the cost of setting up a retirement plan for your team. Businesses are eligible if:
They had 100 or fewer employees during the tax year, all whom received at least $5K in wages; They have not previously had an established company-sponsored benefit over three calendar years (ending April 15th) with regard those same group(s) that will be enrolled via this new arrangement such as members/coaches).
5. New Markets Credit (Form 8874)
The New Markets Credit is a tax credit that supports businesses who invest in Community Development Enterprises and CDFIs. Projects qualifying for this particular grant typically involve the acquisition, renovation or construction of real estate located within low income areas – making it an ideal way to provide resources those communities need most!
The following are projects that qualify for the contract:
-Construction or rehabilitation of educational facilities and community centers
Fix and flip businesses, which renovate residential properties. These include hospitals/health care buildings; industrial facilitates with job creation capabilities (elevator installation); etc.
Isn’t it true that my accountant will handle these small business tax credits for me?
If you’re working with a small company accountant, EA, CPA you may anticipate that they’ll do everything within their power to save you money—and great accountants will. While your accountant may point out frequent tax credits and deductions that they know you qualify for, it’s a good idea for you to look through the most prevalent ones on your own.
You may discover a list of tax credits on the IRS’s website if you want to go farther and look for all of the general business credits that are available. Given the previous statement, there’s a good chance you’ll qualify for at least one of the commonly used credits listed above, so it should brighten your day this tax season.
Tax credits are often overlooked, but they can save you big bucks. If you’re a small business owner with employees who want to start a retirement plan, the IRS will reimburse part of your “ordinary and necessary” expenses involved (up to $500 per year) or if you’re an entrepreneur with a qualifying life insurance policy, you may also qualify for a lot of these credits. The Research and Development Credit is also available to qualified taxpayers with less than $5 million in gross receipts during the credit year and less than five years of gross sales. If you own an electric car, including passenger cars or light trucks, your credit can be worth up to $7.The Premium Tax Credit is another also worth considering if you bought your own health insurance through the Health Insurance Marketplace; it’s available for two years in a row and varies greatly based on income level. And if you’ve incurred qualified research and development costs in the United States during this time period (2010-2011), chances are good that the Research & Development Credit could be worth up to $1.25 million or $250,000 each year for five consecutive years—talk about some serious savings.
Remember trust your local EA, CPA with your small businesses tax credits or research everything yourself.
Author’s Note: Please Note the information in this article is for general advice only and not to be used verbatim without knowledge of a business’ situation. For more information, please contact a tax professional, EA, Attorney, CPA familiar with your business’ specific situation.