Tax credit facts for kids

A tax credit is a special way the government helps people and businesses pay less tax. It lets you take a certain amount of money directly off the total taxes you owe. Think of it like a coupon or a discount on your tax bill. Sometimes, it's given because you've already paid some taxes, or to encourage certain actions, like saving energy or going to college.

What are Refundable and Non-Refundable Tax Credits?

Tax credits can work in two main ways:

Refundable Tax Credits

A refundable tax credit means that if the credit is more than the taxes you owe, the government will pay you back the difference.

• Example: Imagine you owe $100 in taxes, but you have a $300 refundable tax credit. You would use $100 of the credit to pay your taxes, and the government would send you a check for the remaining $200. This means your tax bill becomes negative, and you get money back!

Non-Refundable Tax Credits

A non-refundable tax credit can reduce your tax bill to zero, but you won't get any money back if the credit is more than what you owe.

• Example: If you owe $100 in taxes and have a $300 non-refundable tax credit, you would use $100 of the credit to pay your taxes. Your tax bill would become $0, but you wouldn't get the extra $200 back. The unused part of the credit just disappears.

Credits for Taxes Already Paid

Sometimes, money is taken out of your paycheck for taxes before you even get it. This is called "withholding." Many tax systems treat these amounts as credits. If too much was withheld, you usually get that money back. This is common for income tax taken from salaries.

Tax Credits for Individuals

Governments often offer different tax credits to help individuals and families. These can be for everyone or for specific situations. Some credits are only available for a short time.

How Tax Credits Help Low-Income Families

Some tax systems use credits to help people with lower incomes. These credits might depend on how much money someone earns, if they have a family, if they are working, or other things. Often, these credits are refundable, meaning people can get money back even if they didn't owe taxes.

Tax Credits in the United Kingdom

In the UK, there used to be credits like the Child Tax Credit and Working Tax Credit. These were paid directly to families. The amount depended on income, how many children they had, and if any children had disabilities or were over 16 and still studying.

Since 2018, most of these have been replaced by something called Universal Credit. This new system combines several benefits into one payment.

Many people believed that changes to tax credits affected poorer families the most. Experts like Gavin Kelly said that tax credits were important for helping low-paid workers have a better living standard.

In 2015, there was a vote to reduce how much people could get from tax credits. People who disagreed said this would make low-income families even poorer. Charities like Turn2us said it would mean "many of the poorest working families in the UK are going to get poorer."

Tax Credits in the United States

The U.S. government offers several tax credits to help people with lower incomes:

• Earned Income Credit: This credit helps low-income workers, especially those with children. The amount depends on how much they earn and how many children they have. It's a refundable credit, so people can get money back.
• Credit for the Elderly and Disabled: This non-refundable credit helps older people and those with disabilities.
• Retirement Savings Credit: This credit helps people save money for their retirement. It's non-refundable.
• Mortgage Interest Credit: This non-refundable credit can help people with certain home loans.
• Premium Tax Credit: This refundable credit helps individuals and families pay for health insurance policies if they buy them through a special marketplace and have incomes within a certain range.

Tax Credits in Canada

Canada also has several tax credits:

• Canada Child Benefit: A monthly payment to help families with children under 18. It's tax-free.
• Canada Caregiver Credit: Helps people who support a family member with a physical or mental health issue.
• Canada Workers Benefit: A refundable credit for low-income workers.
• Disability Tax Credit: Helps people with disabilities (or their families) reduce their income tax.
• Canada Training Credit: Helps Canadians pay for training courses.
• Home Accessibility Tax Credit: Helps with costs to make a home easier to use for someone with a disability.
• Medical Expense Tax Credit: Helps with medical costs for yourself, your partner, or your children.

Tax Credits for Families

Some tax systems give credits to families with children. These can be a set amount per child or help with childcare costs.

The U.S. system offers these non-refundable family credits:

• Child Credit: Parents can get a credit for each child under age 17. This directly reduces the tax owed.
• Child and Dependent Care Credit: Helps taxpayers pay for childcare for children under 13, so the parents can work or look for a job.
• Credit for Adoption Expenses: Helps with costs related to adopting a child, like fees, legal costs, and travel.

Tax Credits for Education, Energy, and More

Governments also use tax credits to encourage things like education or using less energy.

The U.S. system has these non-refundable credits:

• Education Credits: There are two main credits for college tuition and related school expenses. They help reduce the cost of higher education.
• First-Time Homebuyers Credit: This credit helped people who bought their first home.
• Energy Efficiency Credits: These credits encourage people to buy certain energy-saving items for their homes.

Tax Credits for Businesses

Many governments offer tax credits to businesses. These credits encourage companies to invest in new equipment, create jobs, or operate in certain areas. They are usually non-refundable.

Business Tax Credits in the United States

The U.S. has many non-refundable business tax credits. If a business has more credits than taxes owed in one year, they can often use the extra credits to reduce taxes in future years.

Some examples include:

• Alternative Motor Vehicle Credit: For buying certain vehicles that don't use gasoline.
• Alternative Fuel Credits: For producing certain non-petroleum fuels.
• Disaster Relief Credits: To help businesses in areas affected by disasters.
• Credits for Hiring Specific Groups: To encourage hiring people who might have a harder time finding jobs.
• Research & Experimentation Tax Credit: To encourage companies to do new research and development.

Many states and cities in the U.S. also offer their own tax credits to businesses. These might be for building new facilities or for specific activities.

Federal Investment Tax Credits

These are special incentives from the government to encourage businesses to invest in projects that benefit the public. For example, they might encourage building affordable housing or using renewable energy.

Federal Historic Rehabilitation Tax Credit

This credit encourages people to fix up and preserve old, important buildings. There's a 20% credit for historic buildings and a 10% credit for older non-historic buildings.

Renewable Energy Tax Credits (ITC and PTC)

These credits encourage the use of clean energy sources like solar and wind power.

• Investment Tax Credit (ITC): This credit gives businesses a percentage of the cost of developing renewable energy projects, like solar panels or fuel cells. It encourages upfront investment.
• Production Tax Credit (PTC): This credit gives businesses a certain amount of money for each kilowatt-hour of electricity they produce from sources like wind, solar, or geothermal energy. It encourages ongoing production of clean energy.

These credits have been extended multiple times to keep encouraging green energy.

Low Income Housing Tax Credit (LIHTC)

This program helps build and maintain apartments that are affordable for people with lower incomes. The government gives tax credits to developers who agree to keep rents low for a certain period.

Qualified School Construction Bond (QSCB)

These are special ways for schools to borrow money at very low rates to fix up buildings, buy equipment, or build new schools. Instead of interest payments, the people who buy these bonds get a federal tax credit.

Research & Development Tax Credit

This credit encourages companies to spend money on research and development (R&D) in the United States. It can reduce a company's income or payroll taxes.

Work Opportunity Tax Credit (WOTC)

This federal tax credit gives incentives to employers who hire people who often face high unemployment rates, like veterans or young people. It helps these groups get jobs and gain valuable skills.

American Opportunity Tax Credit (AOTC)

This credit helps students and families pay for college. It gives a maximum benefit of up to $2,500 per student for tuition and related expenses. It's partially refundable, meaning some students can get money back.

State Tax Credits

Many U.S. states also offer their own tax credits. These can be for things like cleaning up old industrial sites (Brownfield credits), making movies (Film Production credits), or using renewable energy. The rules and amounts for these credits vary from state to state.

Oregon Residential Energy Tax Credit (RETC)

Oregon had a tax credit for solar systems. This credit helped people pay for installing solar panels on their homes. However, the state government decided to end this program at the end of 2017.

Value Added Tax (VAT)

In some places, when you buy goods or services, you pay a value added tax (VAT). Businesses that collect VAT can often get a "credit" for the VAT they paid on things they bought for their own business. This is called an "input credit." It helps make sure businesses aren't taxed multiple times on the same product.

Foreign Tax Credit

If you live in one country but earn money in another, you might have to pay income tax in both places. To avoid being taxed twice on the same income, many countries offer a foreign tax credit. This credit lets you reduce your taxes in your home country by the amount of income tax you paid in the foreign country. It's usually non-refundable.

See also

• Tax choice