Tag: Tax credits

Posted on

Top Tax Credits to Save You Money This Year

In our previous installment we talked about the difference between tax deductions and tax credits.  You can check that out here {Blog Post Link}.  In short summary, tax credits reduce your tax liability dollar for dollar where deductions reduce the income your tax is calculated on. The world of tax credits is vast and varied.  In this particular post we will hit on some of the most popular/claimed credits, how much they can make a difference, and some of the qualifications to claim them.  This will be a primer and is certainly not an exhaustive list.  Even I don’t want to sit and read an exhaustive list of tax credits.  I might do it, but it isn’t the most interesting reading in the world.

via GIPHY

To kick things off, we will start with maybe one of the most mis-claimed or misunderstood credits – the Earned Income Credit (EITC).  The EITC is a tax credit intended to provide benefit to lower income tax payers and can actually be refundable.  What does “refundable” mean?  It means that even is your don’t actually owe tax or have withholding, you can still get a tax refund of this credit. {Sweet} The credit is based on a percentage of your earnings and factors in other financial information, like your filing status, how many dependents you have, what kinds of income that you have, and some other specific tax items.  If you make over $68,075 and file a joint return or $61,555 filing as single/head of household, you won’t be eligible for this one.  For 2025, the maximum credit is about $8,000 and is also fully refundable.  To claim the credit, you can file a Schedule EIC along with your annual Form 1040 – you know, your annual tax form.

Another popular credit is the Child Tax Credit (CTC).  The CTC is easy to identify.  It is a flat per dollar amount per child that you have under the age of 17.  

via GIPHY

In July of 2025, President Trump’s One Big Beautiful Bill (OBBB) – could we have any more abbreviations? – increased the 2025 credit amount to $2,200 per eligible child, indexed the credit to increase with inflation, and added some requirements about the parent and child having valid social security numbers.  You must have earned income to claim the credit and if you make over $200,000 as a single filer or $400K for jointly filers, you aren’t able to claim the credit.

Next up on the list of credits you never knew you wanted to know about are Educational Tax Credits.  There are 2 different credits designed to support taxpayers with post-secondary education costs – the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC).  Both credits are designed to help with higher education costs.  The AOTC is the more generous credit of the 2, designed to help only with the first 4 years of college tuition.  You must be at least a half-time student and the student can be you, a spouse or a dependent.  The maximum credit amount is $2,500, with 100% of the first $2000 being eligible for the credit and 25% of the next $2,000.  Up to 40% of the credit can also be refundable.  For the LLC, the qualifications are lower.  The eligible student is required to only be enrolled in one course during the calendar year.  The LLC is available for all years of post-secondary education, including masters and beyond courses, for an unlimited number of years.  The maximum credit annually is $2,000 but is calculated at 20% of your tuition costs up to $10,000.  It is not refundable.  As with most credits, if you make over $90K as a single filer or $180K married filing jointly, you can’t claim the credits.

via GIPHY

The last group of credits we will discuss are energy credits that help the environment. You can claim small credits related to energy efficient improvements to your main home as long as that home is in the US.  The credits are based on how much you spend and are generally capped at $200-$500 but various items can qualify like new windows, insulation, interior and exterior doors, HVAC systems, or hot water heaters.  If you decide to install larger energy items, like solar panels or a geothermal heating system, you can actually claim a tax credit up to 30% of the cost of the improvement.  You want to be sure you check and make sure whatever you are doing meets the requirements, but don’t miss out since they can make a difference.

This list is by no means exhaustive and primarily touches on a few common credits available to individuals.  Business owners have access to a host of other credits like the Research & Development Tax Credit, various employer/employee related credits, retirement plan credits and many others.  

You may be thinking, “Great – now what do I do?”  How do I get these credits?  Are they on a card or something?  To claim these credits, you file and report the required info on various forms as a part of your annual Form 1040 tax return.  Each credit type will have a corresponding form or Schedule and outline what information you need to include in order to properly claim and support the credit.  Be sure that you maintain any documentation necessary to support your credit claim in the event the IRS asks for it, particularly if regarding the EV vehicle credit.  This isn’t one we talked much about due to changing laws, but as with all credit, be sure you can back up the claim.

A few things to keep in mind, if you think you may be eligible to claim any tax credit, be sure that you either consult a qualified professional or thoroughly review the instructions to be sure you meet requirements of the credit.  You don’t want to be claiming credits that you don’t actually qualify for.  If the IRS catches it, your credit claim could get denied and you might end up owing penalties too.  Nobody wants that. This wraps up our discussion on credits.  Be sure when filing your return that you are maximizing everything available to you. Don’t let the G’men be keeping your money.

via GIPHY

Posted on

What is a Tax “Write-Off” Anyway? Is It the Same as a Tax Credit?

For this friendly tax installment, we are going to reverse course from being in the tax weeds and bring it back to things that are basic.  This installment is going to cover Tax Deductions and Tax Credits, what the difference is, and how they work.

I’m sure you have heard of a tax “write off”

via GIPHY

Maybe you have a friend that offers to pay for meals and says, “I can just write it off” or something to that effect.  What does that even mean? Can you invite me to these lunches?

A more technical term for a tax write off is a tax deduction.  All right, got it.  Tax Deduction = Tax write off.  Now what?

via GIPHY

Tax deductions are generally quite broad and cover a wide array of expenses given your specific set of tax circumstances.  First we will start with how your tax is determined.  Calculating tax starts with your income – the amount of money you earn, not necessarily the cash that hits your account.  Once you have your income tabulated, you subtract or “deduct” expenses that are allowed under our tax laws to reduce your income.  This is sometimes referred to as net income or taxable income.  Your tax is then calculated based on your taxable income. So deductions reduce the amount of income that you are required to pay tax on.

Some common deductions for most individuals who are employees might be retirement plan contributions, HSA account contributions, student loan interest, or itemized deductions.  Many individuals take advantage of the increased “standard deduction” rather than itemize those deductions.  Taxpayers who own a business are permitted to deduct from their gross business income a much broader range of expenses – travel, payroll, advertising, and other expenses deemed to be necessary trade or business expenses.

Great, so if I can deduct it, that means the government is paying for it right, by reducing my tax, right?

via GIPHY

Going back to the above, your deductions reduce the income used for calculating your tax not your actual tax directly.  If you spend $3,000 as a deduction, that does not translate to $3,000 in less tax.  You have to look at your tax rate.  If you are in the 20% marginal tax bracket, then that deduction would save you $600 in tax ($3,000 x .2).  If you are in a higher bracket, then your deduction will reduce your tax more.  You can think of deductions as buying things at a discount that is variable from taxpayer to taxpayer based on your tax bracket.  You still have to spend the money, you just save some in tax later when you file your return.

So what are tax credits then?  Is that even a real thing?

via GIPHY

Tax credits actually directly reduce your tax owed instead of the income on which your tax is calculated.  They are factored in after the tax is calculated and reduce it dollar for dollar.  You may be thinking “Well that sounds way better, lets just do that instead”.

That’s because it is better, but tax credits are limited by the government on purpose for this reason.  You have to be eligible to qualify for them, and they are limited to specific circumstances.  For example some prominent credits for individuals are the child tax credit, the earned income credit, the dependent care credit, and the American Opportunity tax credit.  Each of theses credit will reduce your tax directly by the amount of the credit.  Most of them have income limitations and/or other qualifications so that the credit is limited to the targeted groups.  However, definitely take legal advantage of them if you can.  

Business owners have other credits available to them as well on a host of things.  The research and developmental expenditures credit is a big one meant to incentivize businesses to engage in new technology development or processes.  In recent years, many environmental based credits have been opened up for both businesses and individuals to encourage investments in technologies or products deemed good for the environment.

One credit that has been in the news lately is the Employee Retention Credit.  While in theory it was a great credit for business owners to retain employees throughout the pandemic, it was so throughly abused by fraudsters that the IRS shut the credit down and stopped processing new claims.

So, now you know the difference between tax credits and tax deductions.  Tax credits are in effect much better but on the down side, much more limited in applicability.  While tax deductions don’t reduce tax by the same degree as a credit, they are so much broader in availability that they can not be neglected.

I hope this helps the next time you are chatting with you friends about taxes (everyone does this right?) You will be able to throughly the discuss the merits of writing off that Starbucks Latte or new iPad.

As always, if you have specific questions about expenses that could be deductible or credits of which you could take partake, consult a qualified tax professional.  This is a blog, not tax advice.