Popular Tax Credits for 2024-2025: How They Work

Taxes can be complicated, but tax credits are one of the best ways to save money. Whether you’re a worker, a student, or a parent, understanding tax credits can help lower the amount you owe to the government. Tax credits are different from tax deductions, and they can significantly impact your financial situation by reducing your tax liability directly.

When tax season arrives, many people look for ways to minimize the amount they owe or maximize their refund. Tax credits play a crucial role in achieving this. Unlike deductions that only lower your taxable income, tax credits reduce the amount of tax you owe dollar-for-dollar. This means that tax credits can have a much bigger impact on your final tax bill than deductions. Some tax credits even go beyond reducing your tax bill to zero and provide a refund, putting money directly into your pocket.

What Are Tax Credits?

A tax credit is an amount of money that reduces the taxes you owe. Unlike tax deductions, which lower your taxable income, tax credits directly reduce your tax bill. That means if you owe $1,000 in taxes and qualify for a $500 tax credit, you will only have to pay $500. Some tax credits are refundable, which means they can even give you money back if the credit is more than what you owe.
Tax credits are designed to provide financial relief to individuals and families, especially those in lower income brackets. Governments use tax credits to encourage certain activities, such as earning income, supporting children, furthering education, or making eco-friendly choices. Knowing which tax credits you qualify for can help you take full advantage of potential savings.

Types of Tax Credits

There are two main types of tax credits: refundable and nonrefundable. Knowing the difference can help you understand how much you can save.

Refundable Tax Credits

A refundable tax credit can reduce your tax bill to zero and give you a refund if the credit is larger than the taxes you owe. This is great because even if you don’t owe any taxes, you can still get money back. One example of a refundable tax credit is the Earned Income Tax Credit (EITC), which helps low- and moderate-income workers by giving them extra money.
Refundable credits are especially beneficial to low-income individuals and families because they can result in a larger tax refund. Even if you don’t owe any federal income tax, you can still receive the excess amount as a refund, which can provide valuable financial assistance.

Nonrefundable Tax Credits

A nonrefundable tax credit can only reduce your tax bill to zero. If the credit is more than what you owe, you won’t get the extra amount as a refund. For example, if you owe $400 in taxes but qualify for a $600 nonrefundable credit, the extra $200 won’t be refunded. The Child Tax Credit (CTC) is an example of a nonrefundable tax credit.
Although nonrefundable credits cannot generate a refund, they are still valuable because they reduce the amount of tax you owe. Some nonrefundable credits, like the Child Tax Credit, may have a partially refundable portion, allowing taxpayers to receive some benefits even if they owe little to no tax.

Common Tax Credits You Should Know

There are several tax credits available to help individuals and families. Let’s go over some of the most common ones.

Earned Income Tax Credit (EITC)

The Earned Income Tax Credit is for low- to moderate-income workers. If you earn a low wage, this credit can help reduce your taxes and even give you a refund. The amount you get depends on your income, filing status, and the number of children you have.
The EITC is particularly useful because it is designed to encourage work while providing financial relief to those who need it most. If you qualify, the amount you receive can be significant, especially if you have children. However, you must file a tax return to claim the credit, even if you don't owe any taxes.

Child Tax Credit (CTC)

If you have children under 17, you may qualify for the Child Tax Credit. This credit helps parents by lowering their tax bill for each child they claim. The amount can change depending on your income and tax filing status.
Recent tax laws have increased the CTC amount in some cases, and part of it may be refundable. This means that if your credit is larger than the taxes you owe, you could receive part of the remaining credit as a refund. This credit is especially helpful for families with multiple children, as the savings can add up quickly.

Child and Dependent Care Credit

This credit helps parents who pay for childcare while they work. If you pay someone to take care of your child or a dependent while you are at work, you can get a tax credit for a portion of those expenses.
Eligible expenses include daycare, babysitters, or even summer camps, as long as the care is necessary for you to work or look for work. The credit is calculated as a percentage of the qualifying expenses, up to a certain limit.

American Opportunity Tax Credit (AOTC)

The American Opportunity Tax Credit helps students pay for higher education. It covers tuition, books, and other school-related expenses. The best part is that part of this credit is refundable, which means you could get money back even if you don’t owe taxes.
This credit applies to students in their first four years of college and can cover up to $2,500 in eligible expenses per student. Up to 40% of this credit is refundable, meaning students and parents can receive up to $1,000 back even if they owe no taxes.

Lifetime Learning Credit (LLC)

The Lifetime Learning Credit is another education tax credit, but it’s for anyone taking college courses, even part-time students. It can be used for tuition and related expenses, but it is nonrefundable, so it can only reduce your tax bill, and not give you money back.
The LLC is more flexible than the AOTC because it does not have a limit on the number of years you can claim it. It can also be used for courses that improve job skills, making it a valuable credit for lifelong learners.

Energy-Efficient Home Credit

If you make energy-efficient improvements to your home, like installing solar panels or energy-efficient windows, you may qualify for a tax credit. This credit encourages people to use renewable energy and save on electricity bills.
Investing in solar panels, wind energy, or other green home improvements can be expensive, but tax credits can help offset the cost. Some of these credits cover a percentage of installation costs, and they can be used in combination with other incentives to maximize savings.

How to Claim Tax Credits

To claim tax credits, you need to follow these steps:

• Check Eligibility: Each credit has its own rules. Make sure you meet the requirements before claiming it.
• Keep Records: Save receipts, pay stubs, and other proof to show you qualify.
• Complete the Right Tax Forms: Some credits require extra forms. Make sure you fill out everything correctly.
• File Your Taxes on Time: To get your credit, you need to file your tax return before the deadline.

Tax Credits vs. Tax Deductions

Many people confuse tax credits with tax deductions. Here’s the difference:

• Tax Credits: Reduce the amount of taxes you owe directly. If you qualify for a $500 tax credit, your tax bill goes down by $500.
• Tax Deductions: Lower your taxable income. For example, if you earn $50,000 and have a $1,000 deduction, your taxable income becomes $49,000. This means you pay less in taxes, but it’s not as powerful as a tax credit.

Maximize Your Tax Savings with Global FPO

Tax credits can significantly reduce your tax burden, but understanding and claiming them correctly is essential to maximizing your savings. Whether you are a worker, a parent, a student, or a homeowner, there are numerous tax credits available to help you save money.
To ensure you don’t miss out on valuable tax credits, consider working with Global FPO, a trusted provider of professional tax and accounting services. Global FPO specializes in helping individuals and businesses navigate the complexities of tax credits, ensuring you claim every credit you're eligible for. Their team of experts can guide you through tax planning, filing, and optimization, making tax season stress-free and financially rewarding.

FAQs

1. What is the difference between a tax credit and a tax deduction?
A tax credit directly reduces the amount of taxes you owe, while a tax deduction lowers your taxable income, which may reduce your tax bill indirectly.

2. What are refundable tax credits?
Refundable tax credits can reduce your tax bill to zero and even give you a refund if the credit exceeds the taxes you owe.

3. How can I qualify for the Earned Income Tax Credit (EITC)?
To qualify for the EITC, you must have earned income, meet income limits, and file a tax return, even if you don’t owe taxes.

4. Can I claim multiple tax credits in the same year?
Yes! As long as you meet the eligibility requirements for each credit, you can claim multiple tax credits on the same tax return.

5. How can Global FPO help me with tax credits?
Global FPO provides expert tax filing and advisory services to help you identify and claim all eligible tax credits, ensuring maximum savings on your taxes.