The Internal Revenue Service offers the possibility to get different tax credits, which can be a significant financial benefit for taxpayers. These credits can lead to substantial savings for millions of Americans.
But do you know what they are? Actually, a tax credit directly reduces your tax liability by an equivalent dollar amount. That is a dollar-for-dollar reduction of your tax liability. This means that if you have a tax credit worth $2,000, it directly reduces your tax bill by $2,000. This is different from a tax deduction, which only reduces the amount of your income that is subject to taxes.
Deduction and the Child Tax Credit Compared
To explain the difference, consider a $2,000 tax credit. This credit will reduce your Internal Revenue Service bill by $2,000 directly. On the other hand, a $2,000 tax deduction reduces your taxable income by $2,000, and the actual savings depend on your tax bracket. For instance:
- If you’re in the 24% tax bracket, a $2,000 deduction saves you $480.
- If you’re in the 22% tax bracket, it saves you $440.
In both scenarios, a tax deduction does not save you the full $2,000 like a tax credit does.
One of the most valuable tax credits available today is the Child Tax Credit. This credit is partially refundable and can be worth up to $2,000 per qualifying child in your household. This means that not only can it reduce your tax liability, but you might also receive a refund if the credit exceeds your tax bill.
Utilizing tax credits effectively can lead to significant savings and reduce your overall tax burden. Make sure to explore all available credits to maximize your tax benefits.
Have you recently completed filing your 2023 taxes and claimed the Child Tax Credit? While you might have benefited from this credit last year, it’s important to note that you may not be able to claim it on your 2024 taxes.
When Your Kid Turns 17
The Child Tax Credit is available for children in your household who are under the age of 17. If you claimed the credit for a child last year who is turning 17 this year, regrettably, you may no longer be eligible for that $2,000 credit. So, this is the main reason for not getting it in 2024 or even 2025.
When Your Income Increases
Your eligibility for the Child Tax Credit can also be affected by a substantial increase in your income. Specifically, you can claim the full credit if your income doesn’t exceed $200,000 as a single tax filer or $400,000 as a couple filing jointly. If your income goes beyond these thresholds, you will lose $50 from the credit for every $1,000 of additional earnings. Bear in mind that:
- The Child Tax Credit applies to children under 17 years old.
- If your child turns 17 in 2024, you may lose the credit.
- Income thresholds for the full credit are $200,000 for single filers and $400,000 for joint filers.
- For every additional $1,000 in income above these thresholds, the credit is reduced by $50.
As you plan for the upcoming tax year, keep these factors in mind to ensure you can maximize your tax benefits and avoid any surprises.
Imagine you’re single and last year you earned $200,000. This year, thanks to a major promotion and raise, your income jumps to $240,000. While an extra $40,000 sounds great, it unexpectedly reduces your credit to $0.
How to Make Up for the Loss of the CTC
Losing a valuable tax break like the Child Tax Credit can be a significant setback. However, there are strategic steps you can take to offset this loss and maximize your tax savings.
Maximize Retirement Contributions
One effective strategy is to increase your contributions to a traditional IRA or 401(k). By doing so, you can shelter more of your income from taxes. Additionally, if you qualify for a Health Savings Account (HSA), boosting your contributions can have a similar tax-saving effect.
Increase Charitable Contributions
If you itemize your tax return, consider increasing your charitable contributions. This not only potentially lowers your IRS bill but also allows you to contribute to causes you care about, giving you a sense of fulfillment.
- Contribute more to a traditional IRA or 401(k)
- Increase contributions to an HSA if you qualify
- Boost charitable donations to lower your IRS bill
By taking these steps, you can effectively manage the impact of losing the Child Tax Credit and continue to enjoy significant tax savings.