We have all heard the term “tax credit,” but even that one term has many different faces. For savvy tax planning and preparation, make sure you know the ins and outs of tax credits so you can maximize your savings when you file.
What Is a Tax Credit?
In the simplest terms, a tax credit is an amount of money you can claim to reduce your tax liability. So, if you owe $1,000 in taxes and you are eligible to claim a $400 tax credit, that reduces your tax liability (i.e. the tax you owe) to $600.
This term “eligible to claim” is definitely important to keep in mind. The IRS won’t automatically apply tax credits for you–you have to know what tax credits are out there, which ones apply to you, and then make sure you claim them.
Tax credits are often offered to help drive economic growth, educational opportunities, and other activities that are, overall, beneficial to the country and to individual communities.
Different Tax Credit Categories
There are also two key types of tax credits that you should know about:
- Refundable tax credits
- Non-refundable tax credits
Refundable and non-refundable tax credits both work the same up until you reach $0 in tax liability. With a non-refundable tax credit, though, the benefit stops at zero even if the credit is worth more than you owe. A refundable tax credit, on the other hand, can carry over into a tax refund (hence the name “refundable”) if your tax liability is reduced past zero.
How Do I Know Which Tax Credits Are Available to Me?
Tax credits can sometimes feel like the IRS’s best-kept secret. To make sure you know about and take advantage of all available tax credits, consider working with a certified tax professional for tax planning and preparation. This way, you know you have someone on your team who has up-to-the-minute information about all the latest IRS news and tax credit information.
The experts at Taxation Solutions, Inc. are available to help with all of your tax planning needs in Cincinnati and the surrounding area. Give us a call today to help maximize your tax credits and minimize your tax liability!