| Common Tax Credits |
| A tax credit is a dollar-for-dollar reduction in your amount of tax. There are two types of credits, refundable and nonrefundable. Refundable credits are allowed even if the amount of credit is more than your tax. For example, if your tax is $100 and you have a $150 credit, you will get a refund of $50. Common refundable credits are the Earned Income Credit, American Opportunity Credit and a portion of the Child Tax Credit. Refundable credits are often scrutinized more by the IRS, and my office can be fined if we help you file a credit for which you are not eligible. You may be asked for more documentation when we are putting these credits on your tax return to protect you and us! Nonrefundable credits are allowed to the extent of your tax liability. For example, if your tax is $100 and you have a $150 credit, you can only use $100 of the credit. The remaining credit may carry over to future years or may be lost, depending on the type of credit. Common nonrefundable credits are the Child and Dependent Care Credit, Adoption Credit, Lifetime Learning Credit, and Residential Energy Credits. Notable Information for 2025: Child Tax Credit has been expanded. It is $2,200 for 2025 with $1,700 as a refundable credit. This amount will be indexed for inflation annually. There are income phaseouts beginning at $200,000 ($400,000 MFJ). Children cannot have turned 17 during the tax year to qualify for the credit. Dependents who do not qualify for the child tax credit may qualify for the $500 Other Dependents Credit. Child and Dependent Care Credit remains relatively unchanged. There was an expansion of the percentage that could make the credit higher (50% or 35% of expenses), but the income limits are very restrictive. Clean Vehicle Credits of up to $7,500 (new) or $4,000 (used) were ended on September 30, 2025. If you have a vehicle that qualified for this credit, the dealer should have given you information to submit including the VIN, purchase date, price, and amount of credit. Residential Clean Energy Credit ends after December 31, 2025. This includes solar, fuel cell, wind, geothermal, and qualified battery storage. It is important to note installation must occur before January 1, 2026 – not just the contract/payment! Energy Efficient Home Improvement Credit includes windows, doors, skylights, and energy audits. This credit also ends December 31, 2025 and the purchased items must be installed before that date. Adoption Credit now includes a refundable portion up to $5,000 for those who adopted qualifying children in 2025. Premium Tax Credits for healthcare, as of now, have not been extended. If you have ACA (marketplace) insurance, it is very important that you do not understate your income. If you receive more credit than you were entitled to, there is no safe harbor beginning in 2026 – if you receive too much credit you will have to pay it all back without limitation. |
| Basic Tax Savings Strategies |
Retirement contribution is the most common tax savings strategy, as it provides a way to defer tax on current income and, in some cases, can provide a tax credit for the retirement savings. Some common retirement contribution pathways: Traditional IRA contributions can be made up to $7,000 per taxpayer ($8,000 if 50 or over) that is not covered by a retirement plan through an employer. If covered through an employer, there are income thresholds that may limit an IRA deduction. Traditional IRAs can be a great tax savings tool, especially if you expect your future tax rate to be less than current rates. 401(k), 403(b), 457, and other workplace retirement plans are useful tools to contribute through your employer, who may match your contributions (free money!), and can lower current tax liability. Contribution limits for these plans are much higher than the regular traditional IRA limits, $23,500, with additional catch-up limitations for those 50 or older. SEP and SIMPLE IRA contributions are similar to workplace retirement plans, but are available to self-employed or small business owners. Health Savings Accounts (HSAs) are another excellent way to defer taxes and use the funds to pay medical expenses (now, or reimbursement in the future). Up to $4,300 can be contributed for an individual or $8,550 for a family plan. It is important to note you must have a qualifying health insurance plan to make these contributions (Medicare does not qualify). Roth IRAs and 401(k)s are a great strategy to save on taxes down the road. They do not provide any tax benefits immediately, but are allowed to grow tax-free. They are not subject to required distributions later in life, and funds can often be accessed without penalty if you need them early (subject to some limitations). Roth IRAs do have income limits for contribution but these could be averted by using a “backdoor” Roth conversion. Note: you cannot have any tax-deferred IRAs to benefit from a backdoor conversion. **Legally avoiding tax is an important strategy but is only a small part of your whole financial picture. I am excited to be announcing a new partnership that I believe will be a great benefit to clients. Stay tuned for another issue of Tax Topics!** |