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Tax Credit

Tax credit — is money that people can eliminate from their taxes. Some tax credits are provided specifically to the business or a certain industry. This method is used to reassign the income of financially disadvantaged citizens. It helps jobless people to avoid financial problems before they find a job. Also, these credits are provided to elders, students, single parents, or self-employed people.  

The amount and the list of tax credits are different in every country. The individual may contact the competent authorities to understand which tax credit they can use and which amount of money can be compensated. The flexible system of tax credits is a necessary element of social policy.  

Goal of Tax Credit

The tax credits are the form of the social support for the various categories of people. The main goal of the tax credits is to reduce the social tension and support the demographic projects. That’s why most of the tax credits are related to the care of children and disabled persons. It is necessary to compensate for such work because, in this case, the citizen effectuates the functions of social services.

Nowadays, the tax credit exists in most developed countries. They allow the families to take care of the minors and elders and save the quality of life. 

Tax Credit and Tax Deduction

The social support consists of the tax credit and a tax deduction. Tax credit reduces the total amount of fiscal compliance. As for the tax deduction, it reduces the taxable income and the total amount of taxes. The amount of the saved money depends on the federal income tax bracket. There are two types of deduction — standard and itemized ones. 

Tax deductions are determined by the law and are calculated according to the conditions of application. Usually, the tax deduction is related to the mortgage, charity, retirement, education, and self-employment expenses.  

The tax credit is more profitable because it decreases the tax due and is not just a taxable income. Certain tax credits provide a refund even without the withholding. The list of tax credits and deductions is indicated on the site of the government. 

Classification of Tax Credits

There are several types of credits. They are divided into non-refundable, partially refundable, and refundable ones. The category of credit depends on the purpose for which it should be provided. The questions related to the refundability of credits are in the jurisdiction of the ministry of finance or the tax authority.

Before asking for a tax credit, the individual should see if such credit is still available. The number of credits changes from time to time. 

Non-refundable tax credit is the item taken directly from the liability to taxation. The taxpayer gets the refund only up to the amount they owe. Mostly, they are related to the environment and care for elders and adopted children.  

Types of non-refundable tax credits:

  • Saver’s credit. This credit can be given to the taxpayer who made the salary reduction contribution. 
  • Adoption credit. This credit is provided to cover the expenses after the adoption of a child or an older person that can’t take care of themselves. 
  • Lifetime learning credit (LLC). This is a credit provided to the parents to lower their expenses for the children's higher education. 
  • Elderly and disabled credit. This credit is given to persons over 65 who are retired or disabled and who receive the taxable income related to the disability.
  • Foreign tax credit (FTC). This credit is used to cover the taxes paid in other countries for the residents or nonresidents of the home country.
  • Residential energy efficient property credit. This credit is aimed to stimulate the taxpayers to use alternative sources of energy (solar batteries, wind turbines) for their homes.
  • General business credit (GBC). This is an assemblage of tax credits that were taken for the business during one tax year. It includes the carry forward credits and the actual ones. The total amount depends on the tax bill.  
  • Credit for holders of tax credit bonds. This credit is provided for several credit bonds, for example, qualified energy conservation bonds, clean renewable energy bonds, and others.
  • Alternative motor vehicle credit. This credit is provided to the drivers who use the cars working from alternative energy sources.        

Partially refundable tax credit provides a certain percentage of tax payment. This sum can amount to 40%. However, it is better to confirm the exact sum. These credits are related to education and child care. 

Types of partially refundable credits:

  • Child tax credit. This is credit provided for each dependent child. The child should be a taxpayer’s relative who has lived with them for more than half a year and received a half of financial support. 
  • American Opportunity Tax Credit. This is a credit provided for residents of the USA to cover the expenses related to the first four years of postsecondary education.

Refundable tax credit is a fully compensable credit. The taxpayer can receive back the whole sum.  

Types of refundable tax credits:

  • Earned income tax credit (EITC). This tax credit helps to reduce the total amount of taxes for the individuals with low income. 
  • Saver’s credit. This credit is given for taxpayers with medium and low incomes to help in the creation of retirement savings. 
  • Child and Dependent Care Credit. This credit is given to the individual who pays for the care of the child or disabled person. 

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