Unlock Your Savings: Are You Missing Out on Tax Credits?
Tax credits are among the most valuable incentives available to taxpayers but are often overlooked. Unlike a deduction, which reduces the top line (i.e. taxable income) and only affects the taxpayers’ bottom line by a fraction of the deduction amount, a credit generally reduces the amount of cash required to cover your tax liability on a dollar-for-dollar basis).[i]
Despite their significant value, many taxpayers remain unaware of or fail to take advantage of the wide array of tax credits available to them. Whether you are an individual, a business owner, or a contractor, understanding these opportunities can have a profound impact on your financial position. This article highlights a variety of often-overlooked tax credits and demonstrates how they can help you retain more of your earnings.
Currently Available Tax Credits
The following is a summary of specific tax credits available to individuals and businesses as outlined by the IRS. For additional information on each of the credits described below, visit www.irs.gov/credits-and-deductions.
Business Credits
Work Opportunity Tax Credit (WOTC) - The WOTC is a federal tax credit available to employers for hiring and employing individuals from certain targeted groups who have faced significant barriers to employment. The WOTC may be claimed by any employer that hires and pays or incurs wages to certain individuals who are certified by a designated local agency (sometimes referred to as a state workforce agency) as being a member of one of 10 targeted groups. In general, the WOTC is equal to 40% of up to $6,000 of wages paid to, or incurred on behalf of, an individual who (i) is in their first year of employment, (ii) is certified as being a member of a targeted group, and (iii) performs at least 400 hours of services for that employer. The credit is limited to the amount of the business income tax liability or Social Security tax owed.
Employee Retention Credit (ERC) - The ERC is a refundable tax credit enacted to provide financial aid to certain eligible businesses and tax-exempt organizations that had employees and were affected during the Covid-19 pandemic. It was designed to incentivize businesses to keep employees on the payroll while the business was shut down due to the pandemic and to financially assist businesses that experienced a significant decline in gross receipts in 2020 or 2021. See Visibility’s article from October 24, 2024, which explores the ERC in more detail and discusses the concerns communicated by the IRS regarding improper ERC claims.
Research and Development Credit – This credit gives business owners a credit against income tax for increasing research activities. Generally, the research credit is equal to the sum of 20% of the excess (if any) of the taxpayer's qualified research expenses incurred in the taxable year over the base amount and is applied against the taxpayer’s income tax liability. For eligible startups that have little or no income tax liability, the Protecting Americans from Tax Hikes (PATH) Act of 2015 enacted rules which allow a qualified small business to elect to apply a portion of the research credit for the taxable year as a payroll tax credit. The Inflation Reduction Act of 2022 further increased and modified the qualified small business payroll tax credit for increasing research activities.
Clean Vehicle Credits - Two different credits are available for qualified vehicles purchased or leased for business use: the clean vehicle credit and commercial clean vehicle credit. There are various requirements to be considered a qualified vehicle, but they generally must be either a plug-in EV or fuel cell electric vehicle. The clean vehicle credit provides for a credit up to $7,500 while the commercial clean vehicle credit can be as much as $40,000. Additional criteria which impact qualification, and the amount of the credit include the weight of the vehicle, whether the vehicle is new or used, and when it was purchased and placed in-service.
Energy-Efficient Home Credit – Eligible contractors who build or substantially reconstruct qualified new energy-efficient homes may be able to claim tax credits up to $5,000 per home. The amount of the credit depends on factors including the type of home, its energy efficiency, and the date when the home is acquired.
o Note – although not a credit, there is also a deduction available for building owners who place in service energy efficient commercial building property (EECBP) or energy efficient commercial building retrofit property (EEBRP). Beginning January 1, 2023, the deduction is available to (i) owners of qualified commercial buildings and (ii) designers of EECBP/EEBRP installed in buildings owned by specified tax-exempt entities, including certain government entities, Indian tribal governments, Alaska Native Corporations, and other tax-exempt organizations.
Advanced Energy Project Credit – Manufacturers and other entities that invest in qualifying advanced energy projects may apply for a tax credit through the U.S. Department of Energy. A total of $10 billion has been allocated for the credits under the Inflation Reduction Act, with $4 billion set aside for projects in certain energy communities over the duration of the program. The tax credit equals 30% of qualified investment costs for projects that meet prevailing wage and apprenticeship requirements or 6% for projects that don't meet prevailing wage and apprenticeship requirements.
Rehabilitation Credit – The rehabilitation credit provides a tax credit equal to 20% of your qualified expenses to rehabilitate historic buildings. The credit is allocated ratably over a 5-year period on your federal income tax return.
Employer-Provided Childcare Credit – The Employer-Provided Childcare Credit offers employers a tax credit up to $150,000 per year to offset 25% of qualified childcare facility expenditures and 10% of qualified childcare resource and referral expenditures as an incentive for businesses to provide childcare services to their employees.
Individual Credits
Earned Income Tax Credit (EITC) – the EITC provides a credit for workers and families with low-to-moderate income. The amount of the credit can range from approximately $600 - $7,800 depending on (i) how many “qualifying” children you have, (ii) your amount of earned income, and (iii) your filing status. Note, however, that you may qualify for the EITC even if you can't claim children on your tax return.
The basic qualifying rules to claim the EITC are as follows:
o You must have worked and earned income under $63,398
o You must have investment income below $11,000 in the tax year 2023
o You must have a valid Social Security number by the due date of your 2023 return (including extensions)
o You must be a U.S. citizen or a resident alien all year
o You must have not filed Form 2555, Foreign Earned Income
o You must meet certain rules if you are separated from your spouse and not filing a joint tax return.
Child Tax Credit – the CTC provides a credit for taxpayers of up to $2,000 for each qualifying child eligible to be claimed on the taxpayer’s tax return. You qualify for the full amount of the 2023 Child Tax Credit for each qualifying child if you meet all eligibility factors and your annual income is not more than $200,000 ($400,000 if filing a joint return).
To be a qualifying child for the 2023 tax year, your dependent generally must:
o Be under age 17 at the end of the year
o Be your son, daughter, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, half-brother, half-sister, or a descendant of one of these (for example, a grandchild, niece or nephew)
o Provide no more than half of their own financial support during the year
o Have lived with you for more than half the year
o Be properly claimed as your dependent on your tax return
o Not file a joint return with their spouse for the tax year or file it only to claim a refund of withheld income tax or estimated tax paid
o Have been a U.S. citizen, U.S. national or U.S. resident alien
Adoption Credit – The adoption credit provides a credit for qualified expenses paid to adopt an eligible child. The credit is nonrefundable, which means it's limited to your tax liability for the year. However, any credit in excess of your tax liability may be carried forward for up to five years. The maximum amount of the credit for 2023 is $15,950 per eligible child.
Child and Dependent Care Credit – The CDCC provides a credit for expenses incurred so that you could work or look for work. The credit is calculated based on your income and a percentage of expenses that you incur for the care of qualifying persons to enable you to go to work, look for work, or attend school.
You may be eligible to claim the child and dependent care credit if:
o You paid expenses for the care of a qualifying individual to enable you (and your spouse, if filing a joint return) to work or actively look for work.
o You (or your spouse if filing a joint return) lived in the United States for more than half of the year. However, special rules apply to military personnel stationed outside of the United States.
American Opportunity Tax Credit (AOTC) - The AOTC is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. You can get a maximum annual credit of $2,500 per eligible student. If the credit brings the amount of tax you owe to zero, you can have 40 percent of any remaining amount of the credit (up to $1,000) refunded to you. The amount of the credit is 100% of the first $2,000 of qualified education expenses you paid for each eligible student and 25% of the next $2,000 of qualified education expenses you paid for that student.
To be eligible for AOTC, the student must:
o Be pursuing a degree or other recognized education credential,
o Be enrolled at least half time for at least one academic period* beginning in the tax year,
o Not have finished the first four years of higher education at the beginning of the tax year,
o Not have claimed the AOTC or the former Hope credit for more than four tax years, or
o Not have a felony drug conviction at the end of the tax year.
Lifetime Learning Credit (LLC) – the LLC is for qualified tuition and related expenses paid for eligible students enrolled in an eligible educational institution. This credit can help pay for undergraduate, graduate and professional degree courses — including courses to acquire or improve job skills. There is no limit on the number of years you can claim the credit. It is worth up to $2,000 per tax return.
To claim the LLC, you must meet all three of the following:
o You, your dependent or a third party pay qualified education expenses for higher education.
o You, your dependent or a third party pay the education expenses for an eligible student enrolled at an eligible educational institution.
o The eligible student is yourself, your spouse or a dependent you listed on your tax return.
Retirement Savings Contributions Credit (Saver’s Credit) – the Saver’s Credit provides a credit for making eligible contributions to your IRA or employer-sponsored retirement plan. Individuals are eligible for the credit if they are (i) age 18 or older, (ii) not claimed as a dependent on another person’s return, and (iii) not a student. The maximum contribution amount that may qualify for the credit is $2,000 ($4,000 if married filing jointly), making the maximum credit $1,000 ($2,000 if married filing jointly).
BNA Portfolio 506-4th: Principles of Income Tax Credits, I. Definition and Function of Credits, A. Introduction
* This article contains a summary of certain credits available generally but does not constitute legal or accounting advice. All situations require specific examination as to availability of each credit.
