As we review our clients’ tax returns from the previous year, we continue to look for opportunities to increase how much they keep of what they earn. We believe everyone should pay what they owe, however, there’s no need to leave a tip.
This can include looking for opportunities to claim tax credits – particularly some of the ones that often go under the radar. In this article, we will cover a couple of tax credits that you may be able to take advantage of to reduce your tax bill in the coming years.
What is a Tax Credit?
Taxpayers often confuse deductions and credits when talking about their tax return. Tax deductions can lower your taxable income before you calculate how much you owe. Tax credits are a step better as they can reduce the amount of taxes you owe dollar for dollar.
For example, if your total tax due is $2,000 and you are eligible for a $2,000 tax credit, your tax liability falls to zero.
There are two types of tax credits – refundable and non-refundable. For refundable tax credits, if a taxpayer’s tax bill is smaller than the amount of the refundable credit, they can get the difference paid to them in their tax refund. For non-refundable tax credits, once a taxpayer’s tax bill is reduced to zero, the taxpayer will not receive any more of the tax credit amount as a refund.
Here are some tax credits you may not be aware of:
Going Green – Residential Clean Energy Credit
To encourage homeowners to invest in clean energy, the IRS offers a credit for 30% of the costs of new, qualified clean energy property installed at your home. Qualified expenses include solar electric panels, solar water heaters, wind turbines, geothermal heat pumps, fuel cells, and battery storage technology. No annual lifetime or dollar limits apply to this credit, except for credit limits for fuel cell property.
For those looking to be more energy efficient, some other tax credits worth exploring include the Energy Efficient Home Improvement Credit, the Alternative Fuel Refueling Property Credit, and the Clean Vehicle Tax Credits.
Caring for Parents – Credit for Other Dependents
If you are paying for your parents’ care or if they are living with you, you may be eligible for a $500 tax credit for each parent. The credit begins to phase out when the taxpayer’s income is more than $200,000 ($400,000 for married filing jointly).
Growing Your Family – Adoption Credit
The cost of adoption can be high, and this credit can help ease the financial burden. The credit can be claimed for qualified adoption expenses including adoption fees, court costs, attorney fees, and traveling expenses. For those whose adoption is finalized in 2023, the maximum amount of the credit is $15,950 per adopted child. There are income limits for this credit, and it is nonrefundable.
Hitting the Books – American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC) is one of the education credits available to U.S. taxpayers. This credit can be up to $2,500 per eligible student and covers qualified expenses paid for the first four years of higher education. These expenses include tuition, required fees, books, supplies, and equipment. The credit covers all of the first $2,000 of qualified expenses and 25% of the next $2,000 of qualified expenses for each eligible student. There are income limits and phaseouts for this credit.
Investing for Retirement – Saver’s Credit
To encourage retirement savings, the government offers a tax credit equal to 10%-50% of your contribution for those who meet certain limited income thresholds. The maximum contribution amount that can qualify for the credit is $2,000 for single filers and $4,000 for married couples filing jointly. Thus, the maximum credit amount is $1,000 ($2,000 for married filing jointly).
Takeaways
Taxes are likely one of your biggest lifetime expenses. In an effort not to leave a tip for the government, it is worth exploring the various tax credits you may be eligible for. The tax code can be complicated and there are opportunities that may be overlooked. If you would like to talk with a financial planner about these credits or other ways to lower your lifetime tax bill, please schedule a call with us here.
Sources: IRS
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