Tax Credits You Didn’t Know Existed
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Tax credits are a great way to lower the amount of taxes you owe the IRS. Unlike deductions, which reduce your taxable income, tax credits cut down your actual tax bill dollar for dollar.
While you may have heard of popular credits like the Child Tax Credit or Earned Income Tax Credit, there are many lesser-known credits out there for individuals and small businesses that could help you save even more. Knowing about these can make a big difference when tax season rolls around.
Residential Clean Energy Credit
If you’re considering making your home more energy-efficient, the Residential Clean Energy Credit can help offset some costs. This credit allows you to claim 30% of the expenses for installing certain renewable energy systems in your home, including:
- Solar electric panels: Generate electricity from sunlight.
- Solar water heaters: Use solar energy to heat your home’s water.
- Wind turbines: Convert wind energy into electricity.
- Geothermal heat pumps: Use the earth’s natural heat for heating and cooling.
- Fuel cells: Produce electricity through chemical reactions.
- Battery storage technology: Store energy for later use (for systems installed after December 31, 2022, with a capacity of at least 3 kilowatt-hours).
This 30% credit applies to systems installed between 2022 and 2032. After that, it decreases gradually:
- 26% for systems installed in 2033
- 22% for systems installed in 2034
There is no maximum limit on the amount you can claim, making this a substantial incentive for investing in renewable energy. Note that this credit is nonrefundable (i.e., it can reduce your tax bill to zero but won’t result in a refund for any excess). Unused credit can be carried forward to future tax years.
Source: IRS: Residential Clean Energy Credit.
Why budgeting works
Starting in 2025, the Clean Electricity Investment Credit offers a tax incentive for investing in clean energy projects, replacing the previous Energy Investment Tax Credit. This credit is technology-neutral, making it applicable to a wide range of clean electricity systems.
Key Features:
- Eligibility: Applies to facilities and energy storage technologies placed in service after December 31, 2024.
- Credit Amount: Base credit is 6% of the qualified investment, increasing to 30% if specific labor standards (e.g., prevailing wage, registered apprenticeships) are met.
Additional Bonuses:
- An extra 10% if the project meets domestic content requirements for steel, iron, and manufactured products.
- Another 10% if the project is located in an energy community (areas with significant employment related to fossil fuels).
This credit is available to both businesses and individuals, with options for direct payment or transfer for added flexibility.
Source: IRS: Clean Electricity Investment Credit.
Help With Your Debt
Employee Retention Credit
The Employee Retention Credit (ERC), part of the CARES Act, aimed to support businesses that kept employees on payroll during the COVID-19 pandemic.
Coverage Period:
- For wages paid from March 13, 2020, through December 31, 2021.
- In 2020, eligible businesses could claim up to 50% of qualified wages per employee, up to $10,000 annually (maximum credit of $5,000 per employee).
- In 2021, the credit increased to 70% of qualified wages per quarter, with a limit of $10,000 per employee per quarter. This resulted in a potential $7,000 per employee per quarter for the first three quarters.
Eligibility:
- Businesses with a significant decline in gross receipts compared to 2019.
- Businesses subject to full or partial suspension due to government COVID-19 orders.
Important Note: The ERC is refundable, meaning businesses can receive it even if it exceeds their tax liability. However, wages used for this credit cannot be counted for other wage-based credits like the Paid Sick Leave Credit.
Source: IRS: Employee Retention Credit Eligibility Checklist.
Work Opportunity Tax Credit
The Work Opportunity Tax Credit (WOTC) rewards businesses that hire individuals facing employment barriers, such as veterans, long-term unemployed, SNAP recipients, and those with felony convictions.
Credit Details:
- Typically, employers receive up to 40% of the first $6,000 in wages paid to eligible employees, for a maximum of $2,400.
- Higher credits (up to $9,600) are available for hiring veterans with service-related disabilities.
How to Claim:
- Submit IRS Form 8850 to your state workforce agency within 28 days of the new hire’s start date.
Source: Work Opportunity Tax Credit.
Credit for the Elderly or the Disabled
If you’re 65 or older or permanently disabled with low to moderate income, you may qualify for the Credit for the Elderly or the Disabled.
Eligibility:
- Aged 65 or older by the end of the tax year.
- Under 65 and retired on permanent and total disability with taxable disability income.
Credit Details:
- Base amounts range from $3,750 to $7,500, depending on filing status. These amounts are reduced by any nontaxable income received.
How to Claim:
- Complete Schedule R (Form 1040) to determine eligibility and calculate your credit.
Adoption Tax Credit
For families planning to adopt or who have already adopted, the Adoption Tax Credit helps offset adoption expenses, including:
- Adoption fees
- Court costs and attorney fees
- Travel expenses related to the adoption
- Other necessary expenses directly related to the adoption process
Credit Amount:
- The maximum for 2023 is $15,950 per child. The credit is nonrefundable but can be carried forward for up to five years if unused.
Income Limits:
- Begins to phase out for families with a modified adjusted gross income (MAGI) over $239,230 and phases out completely at $279,230 or more.
Additional Note: For special needs adoptions, the full credit amount may be claimed even if qualified expenses are lower.
Foreign Tax Credit
The Foreign Tax Credit (FTC) helps U.S. citizens or residents avoid double taxation on income earned abroad.
Eligibility:
- U.S. citizens or residents who pay foreign taxes on income such as wages, dividends, or interest.
How It Works:
- Offsets U.S. taxes owed, up to the amount of foreign taxes paid. Unused credits can be carried back one year or forward for up to 10 years.
How to Claim:
- Use IRS Form 1116 unless your total foreign taxes are $300 or less ($600 for joint filers), in which case you can claim the credit directly.
Source: Foreign Tax Credit.
Premium Tax Credit
The Premium Tax Credit (PTC) helps make health insurance more affordable for those buying coverage through the Health Insurance Marketplace.
Who Qualifies:
- Individuals and families with household incomes between 100% and 400% of the federal poverty level (FPL).
- Those not eligible for other coverage options like Medicare or employer-sponsored plans.
How It Works:
- The credit is based on income and the cost of premiums in your area and can be applied in advance to reduce your monthly insurance premium.
How to Claim:
- File IRS Form 8962 to reconcile advance credit payments with the actual credit amount when filing your tax return.
Source: Premium Tax Credit.
Conclusion
Exploring these lesser-known tax credits can make a big difference in your tax savings, whether you’re investing in clean energy, adopting, or managing foreign income. Each credit has unique rules and benefits, so it’s wise to consult a tax professional for advice tailored to your situation.
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