There are several areas to look at when it comes to having strong overall finances, and one of these that some people don’t spend enough time on is tax breaks. Also known as tax deductions or tax credits (both technically forms of tax breaks), these can refer to a number of different situations where you may have to pay fewer taxes, or perhaps will get some of the money you’ve already paid back from the IRS.
At Diversified Members Credit Union, money management is just one of numerous areas we assist Novi and nearby clients with on a regular basis. We offer everything from basic personal savings accounts up through business accounts, loan programs and more. Keeping you in great financial shape is our top priority. Here are some of the most important tax breaks to be considering, which we’ll discuss in this multi-part blog series.
Tax Deductions Vs. Tax Credits
Before we dig fully into this topic, it’s important to understand the difference between tax deductions and credits. A deduction is an expense you can subtract from your taxable income, while a credit is a dollar-for-dollar reduction of the taxes you owe. So in other words, if you have $1,000 in deductions, that will lower your taxable income by $1,000. But if you have a $1,000 credit, that will lower your taxes owed by $1,000.
Deductions can be taken for items like mortgage interest, charitable donations, medical expenses and more. There are also several tax credits available, which we will get into shortly. And again, the key here is making sure you’re taking advantage of every deduction and credit available to you, as it can really add up over time!
From here, let’s dig into various tax breaks — we’ll discuss which of these categories they fall under once we get to them.
Child Tax Credit
For those with children under the age of 17, you may be eligible for a child tax credit. The credit is worth up to $2,000 per qualifying child, and as much as $1,400 of that may be refundable — meaning if your credit exceeds the amount of taxes you owe, you’ll get that money back from the IRS.
To be eligible, the child must have lived with you for at least half the year and cannot provide more than half of their own support. They must also be a U.S. citizen or resident alien, and you must claim them as a dependent on your federal tax return.
Earned Income Tax Credit
The earned income tax credit is one that’s available to workers with low-to-moderate incomes. The amount of the credit will vary based on your income and how many children you have, but it can be worth up to $6,431 for taxpayers with three or more qualifying children.
To qualify, you must have earned income from working — either from an employer or from running your own business or farm. You also cannot have investment income exceeding $3,700 for the year. And like the child tax credit, you must be a U.S. citizen or resident alien and cannot be claimed as a dependent on another person’s tax return.
In parts two and three of our series, we’ll go over some other breaks to be aware of here. For more on this, or to learn about any of our loan programs or other services to Novi clients, speak with our team at Diversified Members Credit Union today.