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US Tax credits
Tax Credits: What They Can Do For You and How To Get Them
When most Americans think about ways to save money by paying less in income tax, deductions usually come to mind. Common knowledge is that everything you spend money on that the IRS considers tax-deductible should be taken as a write-off from your taxes. Otherwise, you're paying more than you need to.
Every bit of this is true, especially for freelancers and self-employed taxpayers. But sometimes, the focus is so much on deductions that equally valuable tax credits get overlooked. So, how does a tax credit work? Like deductions, credits are one of the most important ways to save on your taxes, but they work fundamentally differently.
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Table of contents
What is a tax credit?...Read more
Tax credit vs deduction...Read more
How do tax credits work?...Read more
What are the tax credits available?...Read more
Child Tax credit...Read more
Earned Income Credit...Read more
Child and Dependent Care Credit...Read more
Education Tax Credit...Read more
Electronic Vehicle (EV) Tax Credit...Read more
What is a tax credit?
If you're not happy with the size of your income tax bill at tax time, there are a few measures you can take, and one of the most effective is tax credits. The major difference between credits and deductions is that deductions subtract amounts from your income. The smaller your income, the less you will pay in income tax.
The tax credit definition, on the other hand, has to do with a lump sum subtracted from your tax bill after your Adjusted Gross Income (AGI) has been determined and your tax bill has been calculated, whether you have deductions or not. A tax credit lowers the amount of tax money the IRS requires you to pay, rather than lowering the amount of your income that can be taxed, as deductions do.
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Credit vs Deduction
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US Tax Credits
The most important tax credits for self-employed and freelancers.
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Earned Income Credit
Find out if you qualify for the tax credits that can reduce your tax bill significantly.
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Tax credit vs deduction
A tax credit reduces your final tax bill, so if Uncle Sam is saying you owe $7,000 in taxes, a $1,900 Child Tax Credit, for example, would take a healthy chunk off your bill, making the total tax you owe $5,100.
Another way to distinguish between the credits and deductions is that credits have the same value across all income levels. Tax deductions can be more or less valuable for different people, depending on what income tax bracket they're in. So a tax credit takes the same amount off the tax bill for a wealthy person paying a higher tax rate as it does for someone making a lot less money.
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How do tax credits work?
To claim one of the credits available to taxpayers, you must meet the required qualifications, which are different for every credit, and you need to file the tax forms necessary for the IRS to know that you qualify and that you are claiming the credit.
Quick tip
Some tax credits you can claim after you've already filed your tax return.
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What are the tax credits available?
The IRS makes credits available for several reasons. For the most part, tax credits function as incentives to encourage taxpayers to do something the government sees as beneficial for society, or they provide a much-needed benefit to under-resourced Americans.
There is a wide variety of credits available to individuals and businesses, and you can check tax credits with the IRS by visiting their website. The credits that benefit individual taxpayers the most each year are:
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Child Tax credit
This is a perfect tax credit example because it is designed to benefit under-resourced Americans, in this case, parents, by helping offset the costs of raising a child. Parents can decide how they want to use the Child Tax Credit. There are really no restrictions on how the funds can be used.
Parents can receive a Child Tax Credit for each qualifying child, and they don't have to owe taxes to get it, meaning this credit is fully refundable. The best way to know if you qualify to receive the credit is if you claim a child as a dependent. For the 2022 tax year, the maximum credit amount is $2,000.
Children who meet the requirements for the Child Tax Credit are U.S. citizens, U.S. resident aliens or U.S. nationals. They must be under 18 years of age at the end of the tax year, and they need to live with you for more than half the year. Exactly how much you can receive as a Child Tax Credit varies according to regulations, but it depends on your income.
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Earned Income Credit
The Earned Income Tax Credit (EITC) is designed to benefit under-resourced working families. Qualifications for the credit have to do with income and how many children a family has. It's based on any taxable income a family has earned throughout the tax year, such as salary or wages from a job or 1099 payments if the taxpayer is self-employed or freelancing.
Depending on a person's income level, the credit can lower the amount of tax people need to pay on their adjusted gross income and give working families, particularly families with children, some much-needed tax relief. Essentially, the Earned Income Tax Credit benefits people who work by reducing their tax liability by a percentage of their annual income.
For the 2022 tax year, the maximum amount you can receive is $6,935. You can also claim this tax credit for up to three years from the original tax filing date.
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Child and Dependent Care Credit
The Child and Dependent Care Credit is different from the Child Tax Credit in that it is dedicated to a specific child-related expense many families have. This credit helps families cover childcare costs, such as daycare, so the parents can work or look for work.
It also can be applied to the cost of caring for a spouse who is incapacitated or an adult dependent. This tax credit amount ranges from 20% to 35% of your care expenses, the maximum being $3,000 for a single dependent
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Education Tax Credit
The IRS offers tax credits for students and their parents who have an income below a certain threshold, the IRS offers tax credits to ease the tax burdens on them. By lowering the financial barriers for American students, education credits are an incentive to get a college education.
There are several credits set up to benefit undergraduate students and their parents. Some of the credits are refundable, and some are not, but all are based on income thresholds. Educational tax credits like the American Opportunity Tax Credit or the Lifetime Learning Credit can be used for a variety of education expenses, including tuition, school fees, books and other supplies required for coursework.
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Electronic Vehicle (EV) Tax Credit
As the global mobility and automotive sector continues moving toward greener technologies with battery-powered vehicles, the IRS incentivizes Americans not to be left behind. By offering credits to those who buy electric vehicles, the government motivates Americans to adopt technology that is less damaging to the natural environment than fossil fuels.
EV tax credits are provided when a consumer buys a vehicle from the IRS-approved list of qualified EVs. Different qualifications determine exactly how much credit a new EV owner can receive.
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What’s FlyFin?
FlyFin can help taxpayers claim both tax deductions and tax credits. It's the world's first A.I. tax service for freelancers, gig workers, independent contractors and sole proprietors to find every possible tax deduction and save more on taxes.
With a man+machine strategy, FlyFin keeps users aware of credits, sends reminders of IRS deadlines and provides 24/7 consulting with its tax CPA team.
An expert CPA files a guaranteed 100% accurate tax return for FlyFin users – to save them a few thousand dollars on average and significant time on their taxes.
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