how to reduce your taxes tax credits
tax credits are legislative enactments that allow a taxpayer to reduce the amount of tax they owe after a taxpayer s tax liability is calculated a taxpayer may then directly reduce their liability by tax credit amounts they are eligible for take a taxpayer who has one child and is eligible for the child tax credit the taxpayer s taxable income is 50 000 and the taxpayer s tax liability is 4 500 the child tax credit directly reduces the tax liability from 4 500 to 2 900 the child tax credit is not applied to the 50 000 of taxable income instead it is directly applied to the tax liability amount 24the largest tax credits are all associated with legislative incentive endeavors for specific types of taxpayers for example the earned income tax credit awards tax credits to those of low income while the american opportunity tax credit and lifetime learning credit award those pursuing higher education the child and dependent care credit benefits those with children dependents some federal tax credits are nonrefundable meaning once they reduce your tax liability to 0 a taxpayer may not receive additional benefit nor receive a refund due to an unused portion of the credit an example of a nonrefundable tax credit is the adoption tax credit once the credit reduces a taxpayer s tax liability to 0 the taxpayer will simply not pay tax 25on the other hand other credits may be refundable not only can refundable tax credits reduce a taxpayer s liability to 0 but they may flip the taxpayer into receiving a tax refund for example if you owe 750 in taxes but qualify for a 1 000 refundable tax credit you would ultimately receive a 250 tax refund be mindful that some credits are partially refundable for example in 2023 the child tax credit of 1 600 is partially refundable in 2024 up to 1 700 is refundable 2627state income tax vs federal income taxit is important to distinguish between the definition of income tax and federal income tax in the u s governments at the state level may also levy income taxes in addition to federal income taxes not all states have state level income taxes as of 2023 alaska florida nevada south dakota tennessee texas and wyoming don t have an income tax new hampshire taxes dividends and interest income only but the state will completely phase out these taxes by 2027 28individual vs other federal income taxesthe information above has been primarily informative regarding individual federal income taxes the irs also collects tax revenue from other entities businesses must report income and receive tax benefits similar to individuals certain legal business forms such as partnerships have a different tax filing date compared to individual filers 29 in addition businesses are subject to a wide range of tax credits only available to businesses many credits derive from the general business credit filed using form 3800 30charities and nonprofits that have received tax exempt status must also usually file a form 990 with the irs to maintain their tax free status this information return does not result in any taxes owed from the nonprofit however information provided on the return may result in further evaluation or revocation of the tax advantaged status 31last international individuals or businesses may be required to file federal taxes within the u s there are specific rules for foreign entities with income generating activities within the united states and domestic entities with income generating activities outside the united states 32