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Ralph Estep, Jr. provides an elaborate analysis some don't miss tax credits and deductions, specifically focusing on the child tax credit, earned income tax credit, lifetime learning credit, and the residential energy efficient property credit.
Are you looking to save money on your taxes and potentially lower your tax bill? Understanding tax credits is the key! In this blog post, we will dive deep into the world of tax credits and deductions, covering everything you need to know to maximize your tax savings. From the child tax credit to the earned income tax credit, we'll explore the most common credits for 2024. We'll also touch on some lesser-known credits like the lifetime learning credit and the residential energy property credit. So, let's get started on this financial journey!
Before we delve into the specific tax credits, let's clarify the difference between a tax credit and a deduction. While both are valuable tools to reduce your tax liability, they work in different ways.
A tax deduction lowers your taxable income by subtracting eligible expenses or deductions from your total income. This reduces the amount of income that is subject to taxation. Deductions are used to reduce your taxable income, starting with your adjusted gross income. They can include expenses like mortgage interest, property taxes, and other qualifying expenses. Deductions help determine your taxable income and the resulting income taxes.
On the other hand, a tax credit directly reduces the amount of tax you owe. It is applied after your taxable income has been determined. Tax credits are used to reduce your tax liability dollar for dollar. For example, if your total tax burden is $4,000 and you have a tax credit of $2,000, your new tax bill will be reduced to $2,000. Tax credits can provide significant savings if you meet the eligible criteria.
The child tax credit applies to eligible taxpayers who have qualifying children under the age of 17. To qualify, the child must be a US citizen, national, or resident alien, and meet certain relationship and residency tests. The credit amount can be up to $2,000 per child and directly reduces your federal income tax owed. There may be phaseouts depending on your income, so it's essential to consult the IRS website or a tax professional for accurate information.
The earned income tax credit is designed to help low to moderate-income individuals and families. The credit amount depends on factors such as income, filing status, and the number of qualifying children. It is refundable, meaning it can result in a refund even if you don't owe any tax. The EITC has specific eligibility requirements and income limits, so it's crucial to understand if you qualify.
The lifetime learning credit allows taxpayers to claim a credit for qualified education expenses paid for themselves, their spouse, or their dependents. It applies to undergraduate, graduate, or professional degree courses, as well as courses to acquire or improve job skills. The credit amount is based on qualified expenses and the taxpayer's income. It cannot result in a refund but can significantly reduce your tax liability.
This credit applies to the installation of solar electric systems, solar water heating systems, geothermal heat pumps, and small wind turbines. If you've made energy-efficient improvements to your home, you may be eligible for this credit, which helps offset the cost of the upgrades. Many other tax credits are available for different purposes, such as education, energy efficiency, and adoption. Consult the IRS website or a tax professional for more information on eligibility and claiming these credits.
Understanding tax credits can make a significant difference in your overall tax liability and financial well-being. By taking advantage of tax credits like the child tax credit, earned income tax credit, lifetime learning credit, and residential energy property credit, you can save money and keep more of your hard-earned income. Remember to consult with a qualified tax professional or refer to the IRS website for detailed information on eligibility and how to claim these credits. Stay financially savvy and maximize your tax savings!
Thank you for reading today's blog post. We hope you found it informative and helpful in your financial journey. If you have any feedback or suggestions for future topics, we'd love to hear from you. Visit our podcast page at Ask Ralph Podcast.com and leave us a review or send a message. Until next time, God bless you and stay financially savvy!
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EP 32 - Don't Miss These Tax Credits
[00:00:00]
Get ready to unlock the secrets of tax credits and deductions in our latest episode of the Ask Ralph podcast.
Did you know that understanding tax credits can save you money? And potentially lower your tax bill.
Well we're going to break it down. The difference today between a tax credit. And a deduction for you. And explore some of the most common tax credits that are available when you're preparing your 2023 tax return here in 2024. From the child tax credit to the earned income tax credit, we're going to cover it all.
Plus, we'll delve into some lesser known credits. Like the lifetime learning credit and the residential energy property credit.
So, stay tuned and join us on this financial journey.
[00:01:00] Welcome back to another episode of the Ask Ralph podcast, where we dive deep into the world of finance, taxes, business growth, and personal success.
I'm your host, Ralph Estep, Jr. And today we have an exciting topic to discuss. The difference between a tax credit and a deduction.
We're also going to explore some of the most common tax credits that you can use in 2024. When you file your 2023 return. And touch on some lesser known credits as well.
But before we get started, let me ask you a question. Did you know that understanding tax credits can save you money? And potentially lower your tax bill. Well, we're going to dive right into that today and uncover some of these secrets.
So, let's answer the question.
What exactly is the difference between a tax credit and a deduction?
Let's break it down. Tax credits and deductions are both valuable tools that can help reduce [00:02:00] your tax liability. But they work in different ways.
A tax deduction lowers your taxable income by subtracting eligible expenses or deductions from your total income. This reduces the amount of income that is subject to taxation.
So, for example, we would start with your adjusted gross income. We add in your W2 wages. We add in your interest income. Maybe pension income or other incomes. And then these deductions. Are used next to reduce your taxable income. And then your income taxes based on that taxable income.
Now on the other hand. a, tax credit directly reduces the amount of tax you owe. It's applied after your taxable income has been determined.
So for example, we start with your adjusted gross income, then we have, uh, a place to deduct your deductions. Sound like I was being a little redundant there. For example, mortgage interest, property taxes, all those things. Schedule A items. That arrives [00:03:00] us at taxable income. That taxable income is then subjected to the tax that applies to that amount of income. But then the tax credit actually reduces the tax dollar for dollar.
So let's talk about some of the most common tax credits for 2024. Again, these are going to be used for filing your 2023 tax return. These credits can provide significant savings. If you meet the eligible criteria.
The first credit we'll discuss the child tax credit.
This applies to probably 90% of my clients that have children. This credit allows eligible taxpayers to claim a credit for each qualifying child under the age of 17. That's the key. They have to be under the age of 17. The current amount may vary based on income level and other factors, but it can be a substantial benefit for families.
So let's break down some of the details.
Eligibility. To qualify for the child tax credit. As we talked about, the [00:04:00] child must meet certain criteria. They must be under the age of 17 at the end of the tax year. be a U S citizen, national, or resident alien. And meet the relationship test. For example, that would be your child, a stepchild, foster child, sibling, or descendant. Of any of them. And live with you for more than half the year.
So once they're eligible. the credit amount can be up to $2,000 per child.
Now you have to understand that as I'm recording this, these numbers could change as tax laws change. This is a tax credit. Meaning directly reduce the amount of federal income tax owed by the taxpayer. So as we talked about a few minutes ago, If we come up that your total tax burden is $4,000. For example. And you have one qualifying child. And the child tax credit is $2,000. Then your new magic tax bill has been reduced to $2,000. So that's how that credit works. Now there are phase outs, [00:05:00] depending upon your income. So you want to consult with the IRS website or, you know, work with somebody like myself to handle that.
And there is what's called the additional child tax credit. So if the child tax credit exceeds the amount of tax owed, Taxpayers may be eligible for the additional child tax credit. This credit is refundable. meaning, it can result in a refund, even if the taxpayer doesn't own any tax.
So you come up with your total tax burden is $4,000, but let's flip the script and say you have three children. So you would have a child tax credit of $6,000. So basically you would wipe out completely all the tax that you owe. Well, the additional child tax credit would actually let you take that $2,000 and get that as refund coming back to you. So I think we've kind of covered the child tax credit.
Let's move on to the earned income tax credit, or you may hear it called the EITC. This credit is designed to help low to moderate income individuals and families. The amount of the credit depends on factors such as income. Filing [00:06:00] status, and the number of qualifying children. It's important to note that the E I T C is a refundable credit. Meaning that if the credit exceeds the tax liability, The tax payer may receive a refund.
So what we mean by refundable credit versus non-refundable credit. If it's a refundable credit, that means you can actually drive your tax burden below zero, where they'd actually give you money back. A non-refundable credit would just knock out your tax burden, but they wouldn't send you any money back.
So here's some key points to know about the earned income tax credit. As far as eligibility, you must meet certain requirements. Such as having earned income from working for yourself or as an employee. meeting income limits set by the IRS, and filing a tax return, (even if you're not otherwise required to do so. In other words, the IRS can't send you this. Out of, you know, conjure it up out of mid-air you're going to have to file a tax return to make this happen. Now there are some income limits, the income limits for eligibility vary based on filing status [00:07:00] and the number of qualifying children you have. Higher earnings can reduce or eliminate the credit. And there's an upper limit beyond which the credit is no longer available. So there is a sweet spot in this, depending upon what your income is now, as far as qualifying children. Having one or more qualifying children significantly increases the amount of the EIT C you can receive. A qualifying child must meet criteria related to age, relationship, residency, and dependency.
Now the EITC is calculated based on a percentage of your earned income. And the number of qualifying children you have, and I'm not going to get into a discussion about those numbers. The credit gradually increases as earnings rise until it reaches a maximum amount, after which it's gradually phased out. As we talked about, this is a refundable credit. Meaning if the credit amount exceeds the tax owed, you may be eligible for refund. This can provide a significant financial boost to eligible individuals and families.
Now certain individuals without children can also qualify for, for the [00:08:00] EITC.
Although the credit amount is generally lower. In addition, there are specific rules for individuals with a qualifying child who is the child of more than one person.
So this gets complicated as why I preach about this. In my podcast that you really need to work with a tax professional.
Let's move on to some of the lesser known credits that you may not be familiar with.
Once such credit is the lifetime learning credit.
This credit allows taxpayers to claim a credit for qualified education expenses. paid for. Themselves. Their spouse, or their dependence. It can be used for undergraduate, graduate, or professional degree courses. As well as courses to acquire improve job skills. The amount of the credit is based on the qualified expenses and the taxpayers income.
So let's dive into some details about the lifelong learning credit.
As far as eligibility: to qualify for the lifetime learning credit, you must meet certain criteria. You must be enrolled in an eligible educational institution, such as a [00:09:00] college, university, or vocational school. The credit is available for both undergraduate and graduate courses. And there is no requirement to be pursuing a degree or certificate.
Let's talk about what the qualifying expenses: are. The lifetime learning credit can be claimed for tuition and fees paid for eligible courses. This includes expenses like books, supplies. And equipment required for the course. However, room and board costs, transportation, and personal expenses do not qualify for the credit.
So you're going to need to break down those expenses. There are income limits. Meaning the eligibility and the amount of the credit may vary based on your modified, adjusted, gross income.
And we get into a technical term.
There's calculation that's required here. The credit during phases out as income increases, which aggravates a lot of my clients who are. You know, middle to higher income earners. And once you're. You know, modified, adjusted, gross income, exceeds the maximum out you no longer eligible for the credit. [00:10:00]
And I'm going to, you know, the credit could vary depending upon how much income you have, but generally the lifetime learning credit allows you to claim with a 20% of the first $10,000 of qualified expenses with a (maximum credit of $2,000 per tax return. It's important to note that the credit is not refundable. So as we talked about a few minutes ago, this will not allow you to get this money back, but it will negate any tax that you might owe. It can reduce the amount of tax you owe, but cannot result in a refund of exceed your tax liability.
Unlike some other education credits, a lifetime learning credit does not have a limit on the number of years. You can claim it. You can claim your credit for any number of years that you are eligible and have qualifying expenses. So, if you want to be a student for life, you could actually continue to take this lifetime learning credit. However, it's worth noting that you can't claim both the lifetime learning credit and the American opportunity credit for the same student in a single tax year.
Now [00:11:00] let's move on to another lesser known credit and that's the residential energy efficient property credit.
This credit applies to the installation of solar electric systems, solar water heating systems, geothermal heat pumps, and small wind turbines.
If you made energy efficient improvements to your home, you may be eligible for this credit, which can help offset the cost of these upgrades.
It's important to note that these are just a few examples of the many tax credits available.
There are various credits for different purposes, such as education. Energy efficiency, adoption, and more. It's always a good idea to consult with a tax professional or refer to the IRS website for more information on eligibility and how to claim these credits.
Well, before we wrap up today's episode, I want to remind you to visit our podcast page. Ask Ralph podcast.com. We'd love to hear your feedback and suggestions for future episodes. Leave us a review or send a message and click on the little microphone icon, and actually leave us a voicemail message and let us know how we're doing. And what topics you'd like [00:12:00] for us to explore in upcoming episodes.
Thank you for listening to the Ask Ralph podcasts, we hope you found today's episode informative. And helpful in your financial journey.
Understanding these credits can help you maximize your tax savings and keep more of your hard earned money. Remember to consult with a qualified tax professional or refer to the IRS website. For detailed information on eligibility and how to claim these credits.
Remember, this. Understanding tax credits can make a significant difference in your overall tax liability and financial wellbeing. So as I always say, stay financially savvy.
And until next time, God bless! you. [00:13:00]
