Spark Joy With These 5 Popular Tax Credits
What if I told you that you can actually reduce your tax liability to zero—or even below zero?
When someone finds out they are entitled to a tax credit they didn’t expect, there is always such a sense of such absolute joy in their voice. It’s one of the things that I have loved to hear over the last 15 years that I’ve been a tax professional. I bet tax credits even spark joy for Marie Kondo—just as much as a tidy house would.
Why are these people so giddy? What causes this emotional rush? While tax deductions reduce the amount of income subject to tax, tax credits directly reduce the amount of tax you owe. There are two types of credits: non-refundable and refundable.
Most Popular Non-Refundable Tax Credits
The most common type of credits are non-refundable, which can only reduce a person’s tax liability down to zero.
Have you been supporting your son or daughter who is under the age of 24, perhaps while they’re in college? You may be eligible for a $500 per dependent tax credit.
They won’t stay young forever. Once you’ve got an empty nest, check out our advice on how to pivot your finances towards your own needs for a change.
The U.S. is one of the few countries in the world that taxes its residents on their worldwide income, even for those living abroad. If your income is also taxed in a foreign country, you are entitled to a foreign tax credit to mitigate the double taxation.
If you have a diversified investment portfolio, it’s common to have some international investments which incur foreign tax. Betterment calculates your foreign source income on a supplemental tax statement to help you figure out your foreign tax credit.
Elon Musk says that he plans to send 1,000,000 people to Mars by 2050 with “lots of jobs”. Maybe working on Mars is a loophole to this worldwide income taxation problem. Shhhh—dont tell anyone!
Most Popular Refundable Tax Credits
In contrast, valuable refundable tax credits can potentially result in tax liability being below zero—which is otherwise known as a negative income tax.
Did you miss out on a recent stimulus check because you made too much money? No worries! Round 2 qualification is based upon how you file your 2020 tax return in 2021.
If you made $150,000 in 2019, but you found true love, got married, and had a child in 2020—you could qualify for an extra $2,900 ($1,200 for each spouse + $500 for the child) credit when you file your 2020 tax return.
That’s called a “marriage bonus” in tax jargon and you will need the money for diapers for sure.
As part of the TCJA, there is no longer a penalty for not having health insurance. However, you still may be entitled to a tax credit to subsidize the cost of buying health insurance if your income is up to 4 times of the federal poverty line. Think taxes are confusing? Yes! Think health insurance is confusing? Yes! I agree and that’s why the IRS created an “eligibility chart” to help figure out if you can claim the premium tax credit.
This tax credit is only partially refundable. As part of the TCJA, the tax credit for having children under the age of 17 increased from $1,000 to $2,000. Does your family have 2 children? You could be entitled to a $4,000 child tax credit. Go for #3 to get to $6,000!
This incentive is not for everyone. You will lose some or all of your tax credit if your income exceeds $400,000 and you are filing jointly.
Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional.
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