Tax Credits

Tax credits reduce income tax "dollar for dollar," in contrast with a tax deduction, which reduces taxable income.

Tax credits reduce income tax.

Tax deductions reduce taxable income.

Once you get the idea, you'll never forget it. But it can take a couple repetitions before you see the difference.

There are many tax credits available, such as:

• Earned Income Credit
• Education Tax Credits
• First Time Homebuyer Tax Credit

Before getting into the specifics of how each tax credit works, it is essential to develop an understanding of what tax credits are and why they are so helpful to your wallet.

An Example of How Tax Credits Work

Let's say that after figuring in all your deductions, your income tax bill comes to $1,500. But then you discover that you qualify for a tax credit of $500.

Your income tax bill is now reduced to $1,000. A $1,500 tax deduction would not have reduced your tax nearly as much as that $500 credit.

That's the beauty of tax credits: dollar for dollar tax reduction. One dollar of credit reduces one dollar of tax.

For a personalized review of your eligibility for tax credits, contact Pronto today. It is always unfortunate when people who qualify for tax credits do not claim them.

Non-Refundable Tax Credits

The great majority of tax credits are "non-refundable," meaning that they can be used to reduce income tax, but will not be paid out to you once your income tax hits zero.

Non-refundable credits include:

• Adoption Credit
• Lifetime Learning Credit
• Retirement Saver's Credit
• Elderly and Disabled Credit
• Residential Energy Credits

Non-refundable credits are excellent. However, taxpayers should not count on receiving the full amount of non-refundable credits if their income tax liability is at or near zero already.

For example, the guy at Home Depot may tell you that you are going to get a $1,500 tax credit for buying a certain type of heating and air-conditioning machine. But if your tax liability--what you owe in taxes for the year--is not $1,500 or more, you will not receive the full $1,500.

This can be frustrating, but that is the way non-refundable tax credits work: they can only reduce your tax, not create a refund.

Refundable Tax Credits

Refundable credits, meanwhile, are exactly what they say they are: refundable. Meaning that even if your tax is already at zero, the credit will still be paid out to you.

The Earned Income Credit is the most popular example of a refundable tax credit, but there are others, including:

• Additional Child Tax Credit
• First Time Homebuyer Credit
• American Opportunity Tax Credit

Tax credits can make a big difference at tax time. That is why all Pronto tax preparers are trained to seek out tax credits for every client that walks through our doors.