A tax Credit is a type of tax relief. So, if you want to understand what is the Tax Relief Credit, you need to be patient and take a step back because, first, you need to have a clear what tax relief is.
What is tax relief?
Tax Relief is always some kind of government program that helps individuals and businesses reduce their taxes to have some economic relief.
After the pandemic, you may have heard a lot of this term because many measures were taken to help people and businesses overcome the crisis due to the pandemic and the various lockdowns.
Tax relief can happen in many forms, but the principle is always the same: providing some relief from tax duties to people so that they can overcome a difficult period.
Tax relief can therefore be in the way of:
- A reduction in the taxes someone has to pay.
- A tax delay: you don’t have to pay your taxes now, but – if you want or need to – you can pay them later when the difficult period (hopefully) comes to an end.
- Cancellation of taxes. For example, governments can decide that on certain payrolls, for a certain period of time (for example, one year), citizens don’t need to pay taxes. The consequence, in this case, would be that payroll, for that precise period, will be higher for every worker.
What is a tax credit?
Tax Credit is one form of tax relief, and this is how it works: tax credits reduce the amount of taxes you need to pay to the fiscal authorities.
Why is it called a tax credit?
As you know, a debit is something you owe to someone. Credit is something someone else, in this case, the fiscal authorities, owes you.
If you have a tax credit, you can use it to pay your taxes. To understand better how it works, let’s make an example.
The government decided to provide tax relief in the form of a $1000 tax credit for your category of workers: so you have a $1000 tax credit.
When you need to pay your taxes, if you need to pay, say, $3000, you can use the $1000 credit and pay only $2000 of your own money.
Read: Community Tax Review
When can I have a tax relief credit?
Like any other form of tax relief, the government or fiscal authority always decides when, how, and to whom to provide tax relief.
There is always a law or regulation that the authorities discuss, and that needs approval officially.
Then, you can obtain your tax relief credit either:
- Automatically, so that you don’t need to fill any paper or do anything else (this rarely happens);
- Applying for the tax credit, filling in the required paper, and providing the required documents.
Tax relief credits are a great help for people who are struggling economically: it isn’t a delay or a loan. Tax credits are money that you can only use to pay your taxes but that you never need to refund, payback, or pay in a second moment.
Types Of Tax Credits
There are a variety of tax credits available for different types of taxpayers and different types of situations. Here are a few types of tax credits:
1. Earned Income Tax Credit
If you have low or moderate income; then you can lower the amount of your taxes with the help of Earned Income Tax Credit (EITC).
You need to meet certain requirements to qualify for this and file a tax return. Even if owe no tax or are not required to do so, you must still file a tax return to be eligible.
You might get a refund if the EITC decides to reduce your tax to less than zero.
2. Energy Tax Incentives
Government offers various energy tax incentives to make your home or office energy requirement more affordable. You can contact your local state authority for more details.
3. Child Tax Credit
You can decrease the amount you owe on your federal taxes. The credit amount you receive is dependent on your income and the total number of children you are claiming for.
4. Tax Credit in Disaster Situations
The IRS also offers a tax credit to businesses and individuals who have faced hurt by the damages caused due to an emergency or disaster.
5. Tax Benefits for Education
The federal government also offers tax benefits for education that cover tuition fees, college fees, and secondary or elementary school.
Is a Tax Credit Better Than Deductions?
Yes, tax credits are better than tax deductions as deductions only reduce your income tax amount to some extent, while tax credits help in lowering your total tax amount.
For example: assume that your taxable income is $70,000 and you have $10,000 in deductions; then this makes your taxable income $60,000.
If this $10,000 had been taxed at 25%, then you would have saved only $2,500 in deductions. But if $10,000 had been a tax credit, then you would have saved the entire $10,000 and not just $2,500.
Wrapping Up
Tax credits are great incentives offered by the government that can help you save a lot on your taxes.
Various types of tax credits have been added, especially after the pandemic, and so having the right knowledge and what all types of tax credits are available in your state can be a good thing if you want to save some money.
FAQ’s
What Is Standard Deduction for 2023?
$13,850 is the standard deduction for married and single-filing taxpayers. $27,700 for surviving spouses and married people, and $20,800 for heads of household in the year 2023.
Who all are eligible for the IRS Recovery Rebate credit?
If you are a U.S. citizen or resident, have a valid SSN or a dependent who has a valid ATIM or SSN, and are not dependent on some other tax payer, then you are eligible for an IRS recovery rebate credit.
Shefali Jain is a Content Editor & Writer at National Planning Cycles.
After completing her graduation in hospitality, Shefali decided to follow her passion and started writing. Shefali has been writing for two years now and contributes to our website as a skilled editor and content writer with strong research skills. Writing product and service reviews, biographies, and book reviews are some of her key areas, among many others in which she specializes.
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