Tax Credit Wiki

What is a Tax Credit?

Tax Credit Definition

Many people usually hear others saying “I think there’s a tax credit for that” or “Go ahead and deduct it”. These are common words uttered by various individuals when dealing with the income issues in the government.  But having heard about them, you may also wonder their true meaning.  There can be other terms and concepts that you do not fully understand. Such terms are tax deductions, tax benefits and tax credits that play a vital role in being as a member of the society. Today, you will be enlightened anything about tax credits and the related concepts in it.

Tax Credit Defined

It is important that you start with the very basic step in learning about government tax credits. A tax credit is the amount of cash that taxpayers can subtract from the tax amount they owe to their government. The tax credit value relies on a particular credit provided for including the tax credit types granted to businesses or individuals in different locations, industries or classifications.

Tax exemptions and tax deductions reduce the income amount which is taxable. But tax credits are for reduction of the tax owed actual amount. The government grants it to promote specific behaviors like replacing old appliances with efficient ones or helping the disadvantaged taxpayers through total cost reduction of housing.

Tax Credit vs. Tax Deduction

Tax credit and a tax deduction are both common terms used in the government. Many people may interpret it as similar terms. However, they have some distinctions which everybody should understand.

Tax deductions are the qualifying expenses reducing the taxable income. The common deduction on the federal return of your income tax or Form 1040 is provided for the state income tax you are paying. The eligible for government tax credits can subtract the credit amount from the tax liabilities and not taxable income. Child tax credit is the most common tax credit. When have a qualifying child, it is possible that you take credit up of $1 000 each child against the tax liability. If in case you got a federal tax liability amount of $2, 500, one of your child tax credits reduces the liability up to $1, 500.

If you are given the hypothetical choice between a $100 tax credit and a $100 tax deduction, you will get the credit. The $100 government tax credit will reduce the federal tax dollar for dollar ($100). The tax deductions reduce the taxable income about $100. The tax amount result you saved will depend on the marginal tax bracket or simply tax bracket.

Refundable and Non-Refundable Tax Credits

These are the two common terms involved in federal tax. Knowing their distinctions is highly essential for they will help you understand the government tax credit better.

Refundable Tax Credit

These are the credits to be paid to you if eligible. In most cases, the provincial or federal government will pay them to you in some payment series throughout the year for living expenses assistance. The refundable federal tax credits are

  • Working Income Tax Credit
  • Child Tax Benefit
  • GST/HST Tax Credit

Other provinces are also offering tax credits that are refundable applying to territorial or provincial income tax.

Non-refundable tax credit

Every taxpayer may claim the basic tax credit that is non-refundable for the income tax. Their income tax is usually called as personal amount. It has been adjusted annually for inflation as well other factors. But in 2010, the federal tax personal amount was about $10, 382. Every territory and province will set a personal amount for the territorial and provincial taxes.

Every government will allow the tax payers to get the percentage of the total non-refundable tax credit and reduce the taxes that are payable by a specific amount. Taxpayers are allowed by the government to get 15 percent of the non-refundable tax credit.  However, these are only available if you really meet the given conditions. Thus, you have to check your taxation guide to ensure they apply.

Tax Law and Tax Code

Tax laws and codes play a vital role in maintaining the legal process related to taxation issues and concerns. The tax code is the source used by taxation lawyers bearing the responsibility to interpret it for the public.

The tax lawyers deal with numerous secondary sources like numbered Treasury regulations, Internal Revenue Service publications, Mass Market Income Tax Books and revenue rulings. They attempt to place the tax codes to plain languages for the tax payers. Taxpayers may often comply with the tax regulations through observation of guidelines indicated on the secondary publications. But for complex situations, it is suggested to directly consult the tax code and be able to decipher tax law.

The tax law is the area of legal study that deals with regulatory, common law, constitutional and statutory rules that will constitute the laws applicable to tax. It is the method wherein the government delves into in every economic transaction.

Tax Credit Certificate

A Tax Credit Certificate (TCC) is usually utilized by the grantee or even his assignee to pay his internal revenue direct tax liabilities. However, there are exemptions such as the following:

  • Remittance or payment for any withholding tax
  • Payments that arise from tax amnesty availments declared under the legislative enactment.
  • Compromised penalty payment
  • Tax payment not collected or administered by BIR (Bureau of Internal Revenue)
  • Deposit payments on withdrawal of the important articles

The assignment or transfers of TCCs became an industry for some time. The grantee typically transfers at the discount of about 10 percent to 15 percent. This is because it is centered on the cash that may be generated and utilize in the operations. For the transferee or buyer, it is focused on the gain taken from the discount for it utilizes each peso of TCC with fewer costs to benefit from the discount. The broker will gain a professional fee from the transactions completed.

For a government, TCC reduces the cash collections. Transferring TCC to taxpayers with more tax liabilities maximizes the utilization of the same which affecting the collections negatively. TCC grantees will use the TCCs by themselves. With no direct liabilities, it may take a longer period of time to get consumed unless they can look at other alternative minimization schemes on federal tax according to tax law.

Tax planning is composed of 2 equally significant parts. These are utilizing deduction for taxable income reduction and utilizing credits for tax reduction. Tax credit will reduce the tax liability. You may claim government tax credits for childcare expenses, adoption expenses, college expenses and foreign taxes. In addition to, you are also eligible for a tax credit according to your disability or age, retirement savings account contribution or if you have you child staying with you.

Some of the government tax credits may be carried over to various tax years. It implies that the excess tax credits are not actually lost but are carried back to previous tax years, or forwarded to the later tax years. The next tax liability you have is actually the taxation where you are responsible. You will deal on it after your non-refundable tax credit is applied. It is commonly encountered on total tax on the tax form. Your withholding has been the prepayment against the tax liability. Any excess withholding will be refunded as your tax refund.