Taxes. If that word makes you shudder, you’re not alone! The American disdain for taxation is in our history — and our brains. But why do we hate taxes so much? Because we don’t understand them, and we, therefore, naturally reject them. In today’s blog post, we want to help you understand one aspect of filing taxes: tax credits. We specialize in the mortgage credit certificate (MCC) program, which is a tax credit, and that’s why we want to share more about how these credits can help you.
What are Tax Credits?
Let’s avoid hating tax credits — because, hey, they are a good thing! — by understanding them. First, let’s define what they are.
In essence, tax credits are tax incentives. When you receive a tax credit, you can subtract the credit from the tax you owe. Let’s say, for example, you owe $4,500 in taxes. But, you are a first-time homebuyer, so you filed for the mortgage credit certificate MCC program and received the full $2,000 tax credit. You simply subtract your $2,000 credit from the $4,500 you owe, and now you only owe $2,500.
Credits vs. Deductions
Many Americans remain confused about how tax credits differ from tax deductions. Now that you know what a tax credit does, let’s look at deductions. While credits subtract the amount of tax you owe, deductions simply reduce the amount of income you are taxed.
For example, let’s say your income is $50,000 per year. If you receive a fully applicable tax deduction of $1,000, the government can only tax you on $49,000. You often see deductions result from money spent to produce income, which is why many deductions are linked to business expenses. However, deductions can also occur due to income loss or personal expenses.
What’s most important to remember is that credits reduce tax while deductions (and exemptions) reduce taxable income.
Non-Refundable Tax Credits
Most tax credits are non-refundable. What does this mean? It means that tax credits can’t reduce your tax liability below zero. Let’s say that you owe $1,800 in taxes, and with the mortgage credit certificate MCC program, you received the maximum $2,000 tax credit. The MCC credit cannot reduce your liability below zero even though it’s more than the amount of tax owed. In this example, the government won’t owe you the $200 that remains because the credit is non-refundable.
If you are a low-income filer, you might not be able to reap the benefits of these tax credits fully. However, with the MCC program and some other tax credits, you can carry the benefit to next year. And if your income increases and you owe more tax, you can apply the benefit to that specific year.
Popular Tax Credits
Aside from the mortgage credit certificate MCC program, a tax credit for first-time homebuyers, there are many other tax credits. Some of the most popular ones include:
As you can see, there are many different types of credits to consider when filing your taxes. Even if you aren’t a first-time homebuyer working with us on the MCC program, you can certainly reach out if you have any questions about any kind of tax credits. Our online CPA can manage taxes throughout the United States, and for those filing from abroad.