Don't Leave Money on the Table: Essential Tax Credits You Might Be Missing

Tax preparers frequently encounter clients puzzled by the array of tax credits available. Recognizing and properly using these credits can significantly lower your tax liability and, in some cases, even lead to a refund. This article includes the different types of individual tax credits, the distinction between refundable and non-refundable credits, and credit carryovers. By the end, you’ll be equipped to maximize your tax benefits and reduce your financial burden.

What Are Tax Credits?

Tax credits directly reduce the amount of tax you owe on a dollar-for-dollar basis. Unlike deductions, which lower your taxable income, tax credits provide a direct reduction of the tax due. The two main types of tax credits are refundable and non-refundable:

Refundable vs. Non-Refundable Tax Credits

• Refundable Tax Credits: These credits can reduce your tax liability to zero and, if the credit amount exceeds your tax liability, result in a refund. For example, if your tax liability is $400 and you have a refundable credit of $1,000, you will receive a $600 refund. This credit type is often underutilized by low-income individuals who are not required to file a return but could benefit significantly from refundable credits.

• Non-Refundable Tax Credits: These credits can reduce your tax liability to zero but do not result in a refund. For example, if your tax liability is $400 and you have a non-refundable credit of $1,000, your tax liability will be reduced to zero. Still, you won’t receive a refund for the remaining $600.

  
  

Credit Carryovers

Certain non-refundable credits allow unused amounts to be applied to future tax years. This carryover provision can benefit those with lower tax liabilities in the current year but anticipate higher liabilities in coming years.

Common Individual Tax Credits

Here are some of the most frequently claimed individual tax credits, along with their refundable status and any carryover provisions:

• Earned Income Tax Credit (EITC): Aids low to moderate-income workers and families, with credit amounts based on income and the number of qualifying children. Type: Refundable | Max Credit (2024): $7,830

• Child Tax Credit (CTC): Offers up to $2,000 per qualifying child under 17, with up to $1,400 refundable (Additional Child Tax Credit, or ACTC).Type: Partially Refundable

• American Opportunity Tax Credit (AOTC): Available for the first four years of post-secondary education, with a maximum credit of $2,500 per eligible student. Up to 40% (or $1,000) is refundable. Type: Partially Refundable

• Lifetime Learning Credit (LLC): Covers up to $2,000 per return for qualified higher education expenses. This credit is non-refundable and can reduce your tax liability to zero. Type: Non-Refundable

• Saver’s Credit: Incentivizes retirement savings among low to moderate-income individuals, with a maximum credit of $1,000 (or $2,000 for joint filers).Type: Non-Refundable

• Child and Dependent Care Credit: Helps cover childcare or dependent care expenses. At the same time, you work or search for work, offering up to 35% of qualifying expenses (up to $3,000 for one qualifying individual or $6,000 for two or more).Type: Non-Refundable

• Adoption Credit: Assists with qualified adoption expenses, up to $16,810 per child in 2024. Unused portions can carry forward for up to five years. Type: Non-Refundable with Carryover

• Residential Clean Energy Credit: Provides 30% of the cost of installing qualified energy-efficient improvements, like solar panels. Unused portions can carry forward to future years. Type: Non-Refundable with Carryover

• Premium Tax Credit (PTC): Helps individuals and families afford health insurance through a government Health Insurance Marketplace based on family income and premium costs.Type: Refundable

• New Clean Vehicle Credit: Available for purchasing qualifying electric, plug-in hybrid, and fuel cell vehicles, with credit limits based on income and the vehicle’s MSRP.Type: Non-Refundable (No Carryover)

• Previously Owned Clean Vehicle Credit: Encourages purchasing used electric vehicles, offering up to $4,000 or 30% of the vehicle price, whichever is less.Type: Non-Refundable (No Carryover)

• Credit for the Elderly or Disabled: Available to low-income individuals who are 65+ or permanently disabled, up to a maximum of $7,500.Type: Non-Refundable

• Foreign Tax Credit: For those paying foreign taxes on income also subject to U.S. tax, this credit can carry back one year and forward up to ten years.Type: Non-Refundable with Carryover

• General Business Credit: A collection of business-related credits, including some for sole proprietors, which can carry back one year and forward up to 20 years.Type: Non-Refundable with Carryover

  
  

Maximize Your Tax Benefits with Expert Guidance

Our team is here to help you navigate the complexities of the tax code and ensure you fully leverage available tax credits. Contact us for assistance with your tax return and take advantage of credits that reduce your tax burden.