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What Tax Credits Do I Qualify for ?

Here’s a quick rundown of how tax credits function and an outline of the most common ones you could be eligible for. Read on to resolve all your queries!
tax-credits-1
What Tax Credits Do I Qualify for ?
Tax credits are classified as nonrefundable, refundable, or partially refundable. These categories indicate how the credit will be allocated to your tax statement.
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Here’s a quick rundown of how tax credits function and an outline of the most common ones you could be eligible for.

What is a Tax Credit?

A tax credit is a dollar-for-dollar decrease in a taxpayer’s tax burden. This is distinct from a tax deduction. A tax deduction is an amount the IRS permits taxpayers to deduct from their adjusted gross income (AGI) in order to reduce their taxable income.

Tax credits are available at both the federal and state levels. This is to encourage particular behaviors (for example, acquiring an electric car) or to cover the cost of certain costs (e.g., raising or adopting a child).

How Are Tax Credits Calculated?

Taxes are typically calculated based on your income and the tax laws in your jurisdiction. The process of calculating taxes generally involves the following steps:

Determine your taxable income: Your taxable income is the portion of your income that is subject to taxes. This is typically calculated by subtracting any deductions or exemptions from your gross income.

Calculate your tax liability: Once you have determined your taxable income, you can calculate your tax liability using brackets and rates for your jurisdiction. Tax rates are typically progressive, meaning that the higher your income, the higher the tax rate.

Deduct any credits and offsets: You can then deduct tax credits or offsets that you qualify for, such as earned income tax credit or child tax credit. These credits are subtracted from the tax liability, reducing the amount of taxes owed.

Calculate any additional taxes or penalties: Depending on your jurisdiction, there may be additional taxes or penalties that you need to pay. These include self-employment tax or penalty for underpayment of estimated taxes.

Pay taxes: After calculating your liability, you must pay taxes to the government by the due date each year.

Tax credits are classified as nonrefundable, refundable, or partially refundable. These categories indicate how the credit will be allocated to your tax statement. The vast majority of tax breaks are not refundable. A good tax software program will show you any credits you may be eligible for and how to claim them.

Quick Guide to Tax Credits 

Tax credits are a great way to lower your tax bill and increase your refund. Some of the most common tax credits include:

  • Earned Income Tax Credit (EITC): This credit is available to low- to moderate-income taxpayers. It is based on your income and family size.
  • Child Tax Credit: This credit is available to taxpayers with dependents under the age of 17. The credit can go up to $2,000 per child, depending on your income.
  • Lifetime Learning Credit: This credit is available to taxpayers who are paying for post-secondary education for themselves or a dependent. The credit can be worth up to $2,000 per taxpayer, depending on your income.
  • Child and Dependent Care Credit: This credit is available to taxpayers who pay for child care while they are working or looking for work. It can be worth up to $3,000 for one child and $6,000 for two or more children, depending on your income.
  • Adoption Credit: This credit is available to taxpayers who adopt a child. The credit can be worth up to $14,440 per child, depending on your income.
  • Retirement Savings Contributions Credit: This credit is available to taxpayers who make contributions to a retirement savings plan, such as a traditional IRA, 401(k), or SEP. The credit can be worth up to $2,000, depending on your income.

It is important to note that tax laws and calculation methods can vary depending on the country and jurisdiction. The qualifications and maximum credit amount for each credit may also change from year to year. So it’s a good idea to check the tax laws and regulations in your area or speak with a tax professional to confirm your eligibility and the amount you can claim.

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Author

Picture of Fatema Yusuf

Fatema Yusuf

A passionate writer, who loves to write about anything and everything. She usually writes about finance and investment options. She enjoys talking about personal development and loves to help people grow. she loves to cook for kids and upcycle old stuff to give them a new life.

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This page is purely informational. Beem does not provide financial, legal or accounting advice. This article has been prepared for informational purposes only. It is not intended to provide financial, legal or accounting advice and should not be relied on for the same. Please consult your own financial, legal and accounting advisors before engaging in any transactions.

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