Tax season can be a confusing time, especially when it comes to understanding the various tax credits available. Knowing how these credits work can significantly reduce your tax liability and even lead to a refund. This guide aims to clarify the different types of individual tax credits, explain the differences between refundable and non-refundable credits, and discuss credit carryovers. By the end, you’ll know how to maximize your tax benefits and potentially save more money.
What Are Tax Credits?
Tax credits directly reduce the amount of tax you owe on a dollar-for-dollar basis. Unlike tax deductions, which lower your taxable income, credits provide a direct reduction of your tax bill. There are two primary types of tax credits: refundable and non-refundable.
Refundable vs. Non-Refundable Tax Credits
- Refundable Tax Credits: These credits can not only reduce your tax liability to zero but can also result in a refund if the credit amount exceeds your total tax owed. For example, if your tax liability is $400 and you have a refundable credit of $1,000, you will receive a $600 refund. Refundable tax credits are especially beneficial for low-income individuals who may not owe much in taxes but can still receive a refund.
- Non-Refundable Tax Credits: These credits can reduce your tax liability to zero but do not result in a refund if the credit exceeds your tax owed. For instance, if your tax liability is $400 and you have a non-refundable credit of $1,000, the credit will only reduce your liability to zero, and the remaining $600 will not be refunded.
Understanding Credit Carryovers
Some non-refundable credits have carryover provisions, which allow you to apply any unused portion of the credit to future tax years. This can be useful if your tax liability is low in the current year but is expected to be higher in future years, providing flexibility in maximizing tax benefits.
Common Individual Tax Credits
Let’s explore some of the most frequently claimed individual tax credits, indicating whether they are refundable, non-refundable, and if carryover provisions apply.
1. Earned Income Tax Credit (EITC)
The EITC is designed to assist low to moderate-income workers and their families. The credit amount varies depending on your income and the number of qualifying children. For the 2024 tax year, the maximum credit is $7,830.
Type: Refundable
2. Child Tax Credit (CTC)
The CTC offers up to $2,000 per qualifying child under 17 years old. Up to $1,400 of this credit is refundable, known as the Additional Child Tax Credit (ACTC), allowing for a refund even if no taxes are owed.
Type: Partially Refundable
3. American Opportunity Tax Credit (AOTC)
This credit is available for the first four years of post-secondary education, covering tuition, fees, and course materials. The maximum credit is $2,500 per eligible student, with up to 40% (or $1,000) being refundable.
Type: Partially Refundable
4. Lifetime Learning Credit (LLC)
The LLC provides up to $2,000 per tax return for qualified higher-education expenses. Unlike the AOTC, this credit is non-refundable, meaning it can only reduce your tax liability to zero without resulting in a refund.
Type: Non-Refundable
5. Saver’s Credit
This credit incentivizes low to moderate-income individuals to save for retirement, offering up to $1,000 ($2,000 for married couples filing jointly). Contributions to retirement accounts like IRAs and 401(k)s qualify.
Type: Non-Refundable
6. Child and Dependent Care Credit
This credit helps offset childcare costs or care for a dependent while you work or look for work. It covers up to 35% of qualifying expenses, with a maximum of $3,000 for one qualifying individual or $6,000 for two or more.
Type: Non-Refundable
7. Adoption Credit
The Adoption Credit provides financial support for qualified adoption expenses, with a maximum of $16,810 per child for the 2024 tax year. This credit is non-refundable but can be carried forward for up to five years.
Type: Non-Refundable with Carryover
8. Residential Clean Energy Credit
Available for installing qualified energy-efficient improvements, such as solar panels, this credit covers 30% of the cost. Unused portions of the credit can be carried forward to future years.
Type: Non-Refundable with Carryover
9. Premium Tax Credit (PTC)
The PTC assists with covering premiums for health insurance purchased through a government Health Insurance Marketplace. The credit amount is based on family income and premium costs.
Type: Refundable
10. New Clean Vehicle Credit
Also known as the Electric Vehicle (EV) Credit, it is available for purchasing qualifying electric, plug-in hybrid, and fuel cell vehicles. The credit amount can be up to $7,500 depending on the battery capacity. This credit cannot be carried over to future tax years.
Type: Non-Refundable
11. Previously Owned Clean Vehicle Credit
Designed to incentivize the purchase of used electric vehicles, this credit can be up to $4,000 or 30% of the vehicle’s price, whichever is lower. Like the new vehicle credit, this one is non-refundable and does not carry over.
Type: Non-Refundable
12. Credit for the Elderly or Disabled
Available to individuals aged 65 or older or those retired due to a permanent disability, the maximum credit is $7,500.
Type: Non-Refundable
13. Foreign Tax Credit
Individuals who pay taxes to a foreign government on income that is also subject to U.S. tax can claim this credit. It is non-refundable but can be carried back one year and forward up to ten years.
Type: Non-Refundable with Carryover
14. General Business Credit
The General Business Credit is a combination of various credits available to businesses, including sole proprietorships. Unused credits can be carried back one year and forward up to twenty years.
Type: Non-Refundable with Carryover
Take Full Advantage of Tax Credits
Navigating the complexities of tax credits can be challenging, but understanding how they work can help maximize your benefits. Whether you qualify for refundable or non-refundable credits, knowing how to leverage them effectively can significantly reduce your tax liability and even result in a refund. Additionally, understanding carryover provisions can help optimize your tax benefits in future years.
If you need help navigating these credits or have questions about your tax situation, don’t hesitate to contact our office. We are here to ensure you make the most of the tax credits available to you. Together, we can help you achieve a more favorable tax outcome.
