Income Tax Credit Options

Does tax season always confuse you and make you wonder if you are getting the refund you deserve? Use tax credit options to maximize your refund.

Tax filing is a requirement for most adults in the United States. It is a chore some Americans do not look forward to, especially if they expect to owe money. If you often find yourself in that position, it is important to make sure you are making the most of the tax filing process. It is possible you may have previously missed some tax benefits that would reduce the amount you owe. In fact, you may even qualify for a tax refund, depending on your circumstances.

One of the areas to focus on when seeking a refund is income tax credits. There are several specific income tax credits offered annually. They are usually assigned to certain groups, such as students or parents. Exploring available income tax credits could help you find bonuses you did not realize were available to you. However, you need to fully understand how such tax credits work. Some are not as beneficial as they may initially seem. 

What is an Income Tax Credit?

When filing your taxes, you may qualify for one income tax credit or multiple credits. An income tax credit is an amount of money deducted from the taxes you owe for the year. Income tax credit is available for businesses, as well as individuals filing taxes. However, tax filers must meet certain qualifications to receive them. For example, the Child Tax Credit (CTC) provides a tax break for adults with dependent children.

An income tax credit is sometimes given for meeting certain criteria, such as the CTC. However, in other instances it is given as compensation for an overpayment. If the federal Internal Revenue Service (IRS) or a state revenue department determines you paid more than you owed in the previous tax year, you may receive a credit on the current year's taxes. Similarly, if your workplace withholds more earnings than you wind up owing on your tax return, you are eligible for a tax credit. 

How Does an Income Tax Credit Differ from a Deduction?

You may wonder what the difference is between a tax credit and a tax deduction. Both are benefits to you, the taxpayer. However, they benefit you in very different ways. A tax deduction reduces your taxable income by a certain amount. That can reduce the total amount you owe in taxes. However, it does not directly reduce what you owe.

An income tax credit is immediately applied to your tax total. It reduces the total you owe by the specified amount. No extra calculations or formulas are required to determine the amount in question. An income tax credit is considered more beneficial because it is a direct reduction in the total owed.

What Types of Income Tax Credits Are Available?

Income tax credits are divided into three categories, in terms of how they are applied. The first and most potentially beneficial to a taxpayer is a refundable income tax credit. An example of a refundable income tax credit is the 2021 Earned Income Tax Credit (EITC). The full amount of a refundable income tax credit is applied to a taxpayer's return, even if it is a higher amount than the amount owed. For example, if a taxpayer owes $250 and is eligible for a refundable credit of $500, it entitles the taxpayer to receive a refund of $250.

The second type of tax credit is a non-refundable credit. A non-refundable credit is only applied up to the amount owed. For instance, a taxpayer who owes $250 and is eligible for a $500 non-refundable credit is able to have his or her amount owed reduced to $0. No refund beyond that is given. The 2021 Adoption Credit is an example of a non-refundable credit.

The third tax credit category is a partially refundable tax credit. A partially refundable tax credit is refundable up to a certain amount. Usually that amount is the lesser of a flat limit and a percentage. For example, a taxpayer might qualify for the lesser of $500 or 30 percent of the credit remaining. An example of such a credit is the 2021 American Opportunity Tax Credit (AOTC).

How Do You Know How Much You Will Get in Tax Returns?

To understand how to determine the size of the refund to which you are untitled, you must also understand how taxes are calculated. A tax table is a chart used to determine how much a taxpayer owes. The tax table lists amounts based on tax brackets. Tax brackets are determined by the amount of income a taxpayer earns throughout the year. 

If you want to estimate how much you are going to receive as a tax refund on your tax return, you must know what tax bracket you are in. You must also know how much money you earned. If the company for which you work withheld part of your earnings for taxes, subtract that amount. The remainder is the base total you owe. Next, you must apply for refunds or deductions to which you are entitled. That determines the final amount you receive or owe when you file your taxes.

Where Can You Find Income Tax Return Calculators?

If you intend to file your own taxes, it is beneficial to know how to estimate the results ahead of time. However, you may have difficulty estimating your income tax refund on your own. There are several tools available to help you. Many are offered for free directly by state governments. Check your state to see what types of free tools are available. Others are offered through financial publications and tax companies. Here are some top online tax calculation tools from trusted sources:

How Can You Get More Money Back When Filing Taxes?

There are several ways you can qualify for more money back on your taxes besides receiving specific tax credits. If you are married, one option is to rethink your filing status. Sometimes filing separately from your spouse can increase your refund, especially if one of you has a lot of medical expenses. Similarly, claiming versus not claiming dependents can affect your tax refund. Finally, consider how you spend funds, especially towards the end of the calendar year. For example, making a January mortgage payment in the last week of December may boost the deduction you receive for mortgage interest on that year's taxes.