Tax credits often attempt to encourage particular behaviors (e.g. driving an electric vehicle) by rewarding people who engage in those behaviors with a lower tax bill. More broadly, tax incentives include any tax benefit (credits, deductions, etc.) offered in exchange for a certain behavior.
State and federal tax codes give taxpayers ample opportunity to save money through various credits and incentives. Here is a short list of some of the more common one you might be able to take advantage of.
Child Tax Credit
The Child Tax Credit (CTC) is available for taxpayers who pay the majority of the expenses for a child under the age of 17.
To claim the credit, taxpayers must have gross income of at least $3,000; the benefit available with the credit begins to diminish after joint filers exceed $400,000 in modified gross income, and $200,000 for single filers. The maximum benefit available is $2,000 per child claimed.
Electric Vehicles Credit
This credit is a perfect example of a tax benefit being used to incentivize a particular type of behavior — in this case, eco-friendly behavior.
If you’ve purchased a qualified electric vehicle (EV) or plug-in hybrid vehicle (PHEV), you may be eligible. You can claim this credit whether you purchased an electric vehicle (car or motorcycle) for business or for personal use. This is one of the most significant tax credits, offering a maximum benefit of $7,500.
Earned Income Tax Credit
The Earned Income Tax Credit (EITC) provides a benefit for low- to middle-income earners. The benefits available depend on the specifics of the taxpayer’s financial situation. Click here to determine whether or not you qualify.
The highest benefit is available to earners with dependents; earners with three or more qualifying children can receive up to a $6,660 credit, while the maximum for those without dependents is $538.
American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC) provides tax benefits for those who incur costs for qualified educational resources during their first four years of college.
Qualified educational resources include tuition, fees, required books and supplies, and other expenses required for enrollment. Taxpayers who qualify can receive a credit of up to $2,500. The benefit will be reduced for taxpayers with an income of $80,000 for single filers, or $160,000 for joint filers.
Lifetime Learning Credit
Another education-based tax incentive, the Lifetime Learning Credit (LLC) aims to encourage learning by rewarding those seeking to broaden or improve their skill set. When someone incurs costs for undergraduate or graduate coursework, or for classes intended to improve professional skills, that person may be eligible to claim the LLC.
The LLC is worth up to $2,000 per year, per tax return, but the taxpayer must have incurred at least $10,000 in expenses to qualify. Individuals cannot exceed $68,000 in gross income ($136,000 if married filing jointly).
Section 1202 Small Business Stock Exclusion
The Section 1202 small business stock exclusion is a powerful tax incentive designed to stimulate the U.S. economy and encourage economic innovation and development. A host of requirements apply, but the basic idea is that 100 percent of capital gains (up to $10 million, or 10 times the adjusted basis of the stock — whichever is larger) from the sale of qualified small business stock (QSBS) may be excluded from your taxable gross income.
This incentive is often utilized by professionals in the tech sector; after a huge increase in the value of their stock, tech employees can invoke Section 1202 to eliminate capital gains from their gross income. This is why you will frequently hear the exclusion referred to as a “tech stock” credit.
Want to make sure you’re making use of every credit available to you? The best way to ensure you’re minimizing your tax bill is to work with a licensed tax professional who knows the code like the back of their hand. Reach out to our team today to review your case and discover new opportunities for reducing your tax bill.