Basic Information about Income Tax Credits

Income Tax Credits are actually much better for tax payers than income tax deductions. While income tax deductions can lessen your taxable income, income tax credits reduce your tax bill directly. In rare cases, the IRS even ends up paying the tax payer. However, the rules of income tax credits are tricky. Not everyone qualifies for this. You need to be sure that you are actually eligible for credits on your income tax return before filing them. Otherwise, you might have to face fraud charges later on. 

How tax credits affect your tax bill

When you file your income tax returns, you can actually get credited for what your employer already deducted from your paycheck within the fiscal year, or any self-employment fees you may have paid in the past. For example, should your tax bill amount to $750, this full amount is eligible for tax credits. If your employer already paid the IRS $100, and you’re eligible for a $500 tax credit, you will only have to pay the IRS $150. 

Refundable vs. non-refundable tax credits

If you have a refundable tax credit, your tax bill will be eliminated, and if there is any left over from your tax credit this amount will be paid to you. If you have a non-refundable tax credit, your tax bill will be eliminated but the IRS won’t give you back the balance. For example, in a $300 tax bill, should you have $700 non-refundable tax credit, your tax bill will just go down to $0 but you won’t receive anything. If the same tax credit is refundable, you will receive $400. 

Qualifying for a tax credit 

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You must remember that tax credits are limited. A tax credit might apply to your neighbor but not to you and vice versa. For example, your sister might be given a tax credit because she’s paying for the college tuition of several dependents. However, you might not be eligible for the same credit because her salary is within a certain income range, and you earn more than that amount. In the same manner, your father is eligible for income tax credits, but if you are not earning any money, you won’t be eligible for the same tax credit. Your tax credit also takes into account the number of kids below legal age that are still considered your dependents. However, certain factors also come into play. For example, if your spouse is also working, you cannot list the same child twice in your income tax returns. Only one of you can file as the head of the family. 

Choosing between tax credits and deductions 

Some tax credits are also only legally viable if you give up certain factors which allow for tax deductions. You need to compute and compare to see which deductions would lower the taxes you owe, and which ones will only affect your bill minimally. You also need to make sure that you really have all the factors needed to claim a credit. The IRS expects you to know your taxes inside and out, and if it can prove you guilty of manipulating your tax returns to claim more credit than you deserve, you could be in trouble with the law.

Getting an IRS Tax lawyer 

An IRS Tax lawyer does not just represent you in court. A lawyer can also help you understand the ins and outs of your taxes. Getting a lawyer to help you make sense of your tax returns and benefit the best from your tax credits and deductions can really help a lot.