Basics of Tax Credits

Although federal and state income taxes are unavoidable for most of us, tax credits can help to make the load easier. Tax credits allow you to pay a lower amount of taxes based on the amount of people you are required to care for and other very special circumstances.

It is reasonable to assume that someone who only supports two people can afford to pay more taxes than someone who supports five people, even though those two people make the same amount of money. Tax credits help to close these gaps.

Why Tax Deductions Are Necessary?

Although everyone is put into a tax bracket, everyone has their own individual circumstances. Some households may have three people, while other households have ten. Furthermore, the more people a household has, the more likely it will be that those people are non-working dependents (such as children). Although these dependants make no income themselves, it still takes money to care for them. Counting them as a tax deduction helps to lessen the tax burden for the main income earner in the household to help care for these dependants.

Who Can Qualify For Tax Credits?

There are two main tax credits that one may take, both are directed towards families with children. They are the Earned Income Credit and the Child Tax Credit.

The earned income credit is available to anyone who is eligible for it, whether they have children or not, but it is aimed to help lower the tax burden for low-income families. For example, you will receive significantly less from this credit if you are a single person than if you have one or two children. Also, the credit tops out at two children. If you have more than two children, you will still receive the same amount as someone else who made the same income as you, but only has two children. However, a person/family with one child will receive a smaller credit than a family with two or more children. Due to the structure of this credit, earning less does not guarantee a larger credit. This credit gradually goes up with income, reaches a maximum, and then begins to go back down. For example, a person who earned $10,000 and a person who earned $25,000 may receive the same credit, while someone who earned $17,000 may receive a larger credit than both of them (assuming they all have the same amount of children).

The child tax credit is a credit that is available on a per child basis, unlike the previous credit that tops out at two children. This tax credit is also obviously not available to those who do not have children. To receive this credit, you must have a qualifying child. This means the child you are claiming must be:

  • No older than 16 years of age.
  • Related to you or you must be the child’s legal guardian.
  • A US citizen.

When it comes to the earned income credit, even if you owe no taxes because of a very low income, you can still receive a refund from this credit. On the other hand, if your income is low enough that you are tax exempt OR you make over $100,000 (married filing jointly), then you can expect not to qualify for the child tax credit.

There are other tax credits, such as educational credits, that are taken less often but are available for those who qualify for them. To determine if you are receiving all of the tax credits available to you, you may want to consider visiting the IRS website, purchasing tax preparation software, or meeting with a tax advisor.

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