Article Highlights
- Refundable vs. Non-Refundable
- Credit Carryovers
- Earned Income Tax Credit (EITC)
- Child Tax Credit (CTC)
- American Opportunity Tax Credit (AOTC)
- Lifetime Learning Credit (LLC)
- Saver's Credit
- Child and Dependent Care Credit
- Adoption Credit
- Residential Clean Energy Credit
- Premium Tax Credit (PTC)
- New Clean Vehicle (Electric Vehicle (EV)) Credit
- Previously Owned Clean Vehicle (EV) Credit
- Credit for the Elderly or Disabled
- Foreign Tax Credit
- General Business Credit
Clients of tax preparers frequently express confusion regarding the many tax incentives that are accessible to them. Comprehending these credits can have a substantial effect on your tax obligation and, occasionally, lead to a reimbursement. In addition to discussing credit carryovers, this article attempts to demystify specific tax credits and clarify the distinction between refundable and non-refundable credits. You ought should have a better idea of how to take use of these credits at the end.
What Are Tax Credits? Tax credits are sums that, on a dollar-for-dollar basis, lower your tax liability. In contrast to deductions, which decrease your taxable income, tax credits immediately cut your tax liability. Refundable and non-refundable tax credits are the two primary categories.
Refundable vs. Non-Refundable Tax Credits
- Refundable tax credits have the possibility to completely eliminate your tax obligation; if the credit amount is more than your tax obligation, you will get a refund. Put otherwise, you will get a $600 refund if your tax bill is $400 and you have a $1,000 refundable credit. This is when a large number of people who are exempt from filing taxes lose out on significant refundable tax credits meant for low-income persons.
- Non-Refundable Tax Credits: These credits can completely eliminate your tax obligation, but they are not refundable. Your tax liability will be zero if you have a $1,000 non-refundable credit and a $400 tax liability; nevertheless, you will not be refunded for the remaining amount $600.
Credit Carryovers
You can apply any unused amount of some non-refundable credits to subsequent tax years thanks to carryover provisions. If your present tax liability is minimal but you anticipate having larger responsibilities in the future, this can be very advantageous.
Common Individual Tax Credits
Let's examine some of the most popular individual tax credits, noting if they have carryover provisions and if they are refundable or non-refundable.
Earned Income Tax Credit (EITC)
This tax credit is intended to help working families and individuals with low to moderate incomes. Your income and the number of eligible children you have determine how much credit you receive. The maximum credit for the 2024 tax year is $7,830.
Type: Refundable
Child Tax Credit (CTC)
For eligible children under the age of 17, the CTC offers up to $2,000. This credit is refundable up to $1,400, so even if you don't owe any taxes, you can still get a refund. ATC stands for Additional Child Tax Credit, which is the refundable component.
Type: Partially Refundable
American Opportunity Tax Credit (AOTC)
During the first four years of post-secondary study, students are eligible for the American Opportunity Tax Credit. Each qualified student may get up to $2,500 in credit, of which 40% (up to $1,000) is refundable. Tuition, fees, and course materials are covered by the credit.
Type: Partially Refundable
Lifetime Learning Credit (LLC)
This tax credit allows up to $2,000 to be claimed on a tax return for eligible higher education costs. Since the LLC is non-refundable, unlike the AOTC, it can lower your tax burden to zero but won't provide you a refund. You can claim this credit for as many years as you choose.
Type: Non-Refundable
Saver's Credit
The goal of the Saver's Credit is to incentivize those with low to moderate incomes to save for their retirement. Up to $1,000 in value, the credit is non-refundable ($2,000 for married couples filing jointly). Contributions to retirement accounts, including 401(k)s and IRAs, are eligible for this deduction.
Type: Non-Refundable
Child and Dependent Care Credit
This credit helps defray the expense of daycare or taking care of a dependent while you're looking for employment or are employed. The credit has a maximum value of $3,000 for one qualified individual and $6,000 for two or more, and it is worth up to 35% of qualifying costs. There is no return for this credit.
Type: Non-Refundable
Adoption Credit
This program offers financial support for eligible adoption costs. The maximum credit is $16,810 per kid for the 2024 tax year. If the credit exceeds your tax obligation, it can be carried over for a maximum of five years even though it is non-refundable.
Type: Non-Refundable with Carryover
Residential Clean Energy Credit
Installing eligible energy-efficient upgrades, such solar panels and solar water heaters, can generate the Residential Clean Energy Credit. The non-refundable credit is equivalent to 30% of the upgrades' total cost. Parts of the credit that are not used might be carried over to subsequent tax years.
Type: Non-Refundable with Carryover
Premium Tax Credit (PTC)
The PTC assists qualified individuals and families in paying for health insurance premiums in government-run health insurance marketplaces. The amount of the credit is determined by the premium costs and your family's income. If the credit is more than your tax obligation, you may be eligible for a refund.
Type: Refundable
New Clean vehicle Credit
Also known as the Electric Vehicle (EV) Credit, this credit can be used to the purchase of any qualified fuel cell, electric, or plug-in hybrid car. There are limitations based on your income and the car's suggested retail price from the manufacturer. The credit value can be as much as $7,500, depending on the vehicle's battery capacity. You may be able to transfer the credit to the dealer at the time of purchase, which might lower the cost of the car or your down payment, rather than claiming it on your tax return.
Type: Non-Refundable with no carryover
Formerly used Clean Vehicle (EV) Credit
This credit is intended to encourage the purchase of previously used electric cars. The credit can be as much as $4,000 or 30% of the car's purchase price, whichever is lower. Although the amounts are different, there are restrictions on the buyer's income and the vehicle's cost, much like with the New Clean Vehicle credit. There is no rollover and no return for this credit.
Type: Non-Refundable with no carryover
Credit for the Elderly or Disabled
Low-income people 65 years of age or older or retired on permanent and complete disability are eligible for the Credit for the Elderly or Disabled. The credit can only lower your tax burden to zero because it is non-refundable and has a limit of $7,500.
Type: Non-Refundable
Foreign Tax Credit
People who pay taxes to a foreign government on income that is also taxable in the United States are eligible for the Foreign Tax Credit. If this credit exceeds your tax due, it can be carried forward for up to ten years and carried back for one year.
Type: Non-Refundable with Carryover
General Business Credit
The General Business Credit is a group of different credits that are awarded to individuals and are available to businesses, including sole proprietorships. These credits can be carried forward for up to 20 years and backward for up to 1 year, but they are not refundable.
Type: Non-Refundable with Carryover
The aim of our organization is to maximize your tax benefits while assisting you in navigating the complexity of the tax system. Do not hesitate to call our office if you need help with your tax return or if you have any queries. By working together, we can make sure you utilize all of your tax credits.
