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Could you be missing out on tax-savings opportunities?

Many people do not prepare for the impact of taxes on their investment and retirement accounts until they have been negatively affected by them. As we move into tax season, now is a great time to begin thinking about strategic and tactical tax planning for 2021 and beyond. Over the next several weeks we will be posting some valuable tips on how to cut or minimize taxes.

Tax Tip #2 – Pay Attention to Available Tax Credits:

A tax credit is a dollar-for-dollar reduction on the total tax bill, and can be refundable, so they are a great way to reduce taxable income and potentially add to a refund. However, the available credits and their respective rules change regularly, so it is a good idea for you to ensure you or your accountant keep up do date on those that apply to.

Note: at the time of this writing you do not need to itemize your taxes to take advantage of the tax credits cited below.

Common credits include:

American Opportunity Tax Credit – This credit is designed for undergraduate college students and their parents and can be used for a maximum of four years. Taxpayers can claim a credit on the first $2,000 spent on tuition, books, equipment, and school fees, plus 25% of the next $2,000; for an total of $2,500. Up to a max $1,000 may be refunded to you.

Lifetime Learning Credit – This credit can be used by students enrolled in undergraduate, graduate, and non-degree programs, and there is no limit to the number of times it can be used. As of 2021, the taxpayer can claim a credit of 20% of the first $10,000 spent on tuition, fees, books, and supplies. This credit is not refundable. (A nonrefundable credit essentially means that the credit can’t be used to increase your tax refund or to create a tax refund when you wouldn’t have already had one. In other words, your savings cannot exceed the amount of tax you owe.)

Child and Dependent Care Tax Credit – This credit offers taxpayers 20% to 35% of up to $3,000 of childcare costs. Applicable costs include childcare for children under 13 and dependent care for parents or spouses that are incapacitated. The 2021 limit is up to $6,000 of expenses for two or more dependents. This credit is not refundable. Taxpayers can receive a credit up to $2,000 (with up to $1,400 of the credit refundable) per qualifying dependent child 16 or younger at the end of the calendar year. A $500 dollar credit can be claimed for other qualified dependents that meet the following criteria: age 17 or older, have their own taxpayer identification numbers, are dependent parents or other qualifying relatives supported by the taxpayer, or dependents living with the taxpayer who aren’t related.

Residential Energy Credit – In 2021 this credit offers up to 26% of the cost, including installation, of equipment for solar, wind, geothermal, and fuel-cell technology. This credit is nonrefundable.

Check out our other posts to understand how to CUT YOUR TAX BILL IN 2021!

DISCLOSURE: The material above is for informational purposes only and should not be interpreted as legal, tax or financial advice. Always consult your CPA/tax advisor/attorney to discuss your specific situation.

 

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