Saving money on taxes is everyone’s goal, from minimum-wage workers to multi-millionaires. The Internal Revenue Code accepts several areas, offering numerous tax breaks to help you keep some of your income in your own pocket each year.
Unfortunately, all tax breaks can be confusing because each one has its own set of qualified rules. Find out which tax credits you can claim, which you can not, and the definition of all the tax terms associated with them.
Tax Credits vs. Tax Deductions
Tax credits are not the same as tax deductions. Better tax credits.
These deductions are deductions that eliminate your income. If you earn $ 50,000 in the course of the year and you have $ 10,000 in deductions, the IRS will only tax you $ 40,000. Surely a good thing, but compare it with tax credits.
You have already completed your tax return, including getting all deductions that you have the right. Now you realize that your tax planning is off and somehow you owe the IRS $ 1,000. If you are eligible to claim a credit tax of $ 1,000 or more … poof. Your tax debt goes away. You do not owe any IRS. If you owe an IRS $ 2,000 and you are entitled to a $ 1,000 credit, now you owe only the difference – $ 1,000. Credits come from your tax debt, not your income, and they make it dollars for the dollar.
Refundable Credits Vs. Non-Refundable Credits
Now the situation becomes more complicated because there are two types of tax credits: the restoration and the irreversible returns. Most credits, but not all, can not be restored, and there is a significant difference.
An irrevocable tax credit can deduct any taxes you can pay on the IRS, but the IRS will not send you a refund if there is any credit remaining. For example, if you owe $ 1,000 in taxes after completing your tax return and if you can claim $ 2,000 in irrevocable tax credits, your tax debt goes still but is maintained by the IRS the balance-remaining $ 1,000. You can not take it forward in the coming years, and you will not receive cash back for that amount.
Compare this with a refundable credit. If the $ 2,000 credit tax you claim will be refunded, it will remove your tax debt and the IRS will send you a $ 1,000 refund for the balance.
Earned Income Tax Credit
Obviously, refund tax credits are better, but there are just a few of them. Earned Income Tax Credit is one of the most popular.
This credit was introduced in the Internal Revenue Code in 1975 with the idea of putting more money into pockets of low-income taxpayers. As the name suggests, you must get the income from employment for an employer or self-employed. If you have more than $ 3,450 in investment or interest income in 2017, you will not be eligible. Must be at least 25 years of age and you can not return 65. You must have lived in the US for at least six months of the tax year, and you can not claim as a dependent on other taxpayers.
If you are married, you must file a joint return with your spouse.
The value of EITC is structured according to how many dependents you have and your income. If you earn too much, you do not qualify. The more you dependent, the greater your credit. If your income is very low and you have three or more dependents, you may be eligible for an Income Income Credit Credit of $ 6,318 as of 2017.