Tax Credits Could Mean More Money in Your Pocket

Tax liability is something that most taxpayers, including businesses, dislike and want to reduce.

One of the most common questions received from clients concerns reducing income tax liability. Below is a discussion of how taking full advantage of tax credits can help retain more earnings, plus discovery of the types of tax credits that could apply.

Key Distinction: Deductions vs. Credits

"Tax deductions reduce your taxable income, so that when you calculate your tax liability, you're doing so against a lower amount." Meanwhile, "A tax credit... is a dollar amount applied to your total tax obligation and is constant across all tax brackets."

Individual Tax Credits

The IRS categorizes individual tax credits into two main types:

• Nonrefundable credits apply to personal expenses and allow refunds only up to the amount owed

• Refundable credits allow receiving refunds beyond what is owed, including withheld taxes, earned income credit, and health insurance credits

Credits are further separated by purpose:

Family and Dependent Credits: Designed for low-income taxpayers and families with children, including household and dependent care credits and child tax credits.

Income and Savings Credits: Offer relief to those earning low or moderate income, including the Earned Income Credit and retirement savings contributions credit.

Homeowner Credits: Provide relief for low-income homeowners or those maintaining energy-efficient properties.

Health Care Credits: Help taxpayers facing health insurance expenses.

Education Credits: Offer relief for higher education expenses through American Opportunity and Lifetime Learning credits.

Business Tax Credits

Small businesses can reduce tax liability through the general business credit, which encompasses multiple specific credits promoting activities like research, employer-provided childcare, and new pension plans.

Commonly applied business credits include:

• Investment tax credit

• Work opportunity credit

• Low-income housing credit

• Disabled access credit

• Employer-provided childcare credit

• Small employer pension plan startup cost credit

• Employer social security credit

• Small employer health insurance credit

Conclusion

The world of tax credits is vast and can be extremely complex for individuals and business owners who are unfamiliar with tax law. Working with qualified tax professionals helps ensure maximum advantage of available credits to reduce annual tax liability.