Did you know that 32% of American taxpayers are unsure whether they’ll be getting money back or will owe the IRS when they file their taxes?
Unless you keep track of pay stubs and the taxes you pay throughout the year, you are likely to deal with this problem too. You should also understand filing terms like tax credits and tax liabilities.
Keep reading to learn what you need to know about both.
What Are Tax Credits?
Tax credits are subtracted from tax liability. Credits have the same value for everyone who can claim the full value.
Because a lot of tax credits are nonrefundable, they cannot reduce tax liability below zero. This means low-income filers don’t often receive the full benefit of credits that they qualify for.
If the value of a tax credit exceeds income tax liability, the tax credit is refundable. EITC and CTC are two tax credits that are partially or fully refundable.
The most popular tax credits include the following:
- Earned Income Tax Credit
- Child Tax Credit
- Nonrefundable Education Credits
- Refundable American Opportunity Credit
- Foreign Tax Credit
Although there are various other tax credits, individuals tend to get those the most.
For business, the Employee Retention Tax Credit (ERTC) is common. Learn more information about that now.
What Are Tax Liabilities?
Federal tax liability refers to the amount of money owed to the United States government. Tax liabilities are based on rules set by the IRS.
You’ll know your tax liability for any given year after preparing and filing your tax return. If you have unpaid amounts from previous years, they should be added to what you owe on the new return.
An employer likely deducted a percentage from pay stubs for taxes. They send this money to the IRS on the filer’s behalf.
The filer receives a refund from the IRS if the difference between paid taxes and total tax liability results in a negative balance.
Keep in mind that tax liability isn’t limited to the income tax you owe. The term covers all forms of taxes such as self-employment tax, capital gains, etc.
Congress Changes the Rules
Another important thing to know when learning about tax credits and tax liabilities is that the federal government can alter the terms.
For example, they can decide to extend a tax credit or allow it to expire. When they alter the credit, it can be worth more or less than it was years before.
The federal government can change credits from refundable to nonrefundable and vice versa. Qualifications to receive a tax credit can change as well. You can still qualify with zero tax liability.
Tax Information to Help You File
Whether you are filing taxes as an individual or as a business, it’s important to know about tax credits and tax liabilities.
Tax credits are beneficial and can help with a tax break for certain situations. It’s important to know the qualifications before you file.
Tax liabilities are what a filer owes to the IRS and can be calculated through all tax types, not just income earned.
Keep these things in mind when you file your taxes and don’t forget to come back for more informative articles like this.