Before discussing anything, let’s see what is ERC, WOTC, and some other terms. Let’s begin.
Employee Retention Credit
A tax credit of up to $2,100 can be provided for the cost of tuition, course materials and other educational expenses in return for either 100 percent of expenses directly to the employee for tuition, a reasonable portion of the expenses related to housing and transportation (up to $750), or up to 50 percent of other educational expenses (up to $1,050) for an employee enrolled in an eligible program.
As with the American Opportunity Tax Credit, there are no income or age limits to receive the benefit of the tax credit. There is an annual cap of $2,100 for individuals and $4,100 for married filing jointly. ERC or ETC amounts do not include the additional $2,000 per child credit (for those earning under $200,000 with up to $400,000 single or $800,000 married filing jointly).
Work Opportunity Tax Credit (WOTC)
The WOTC can be worth up to $2,400 per year and can be used in most states to defray the cost of relocation expenses. WOTC is also a nonrefundable credit, so it must be used in conjunction with a nonrefundable credit or part of the American Opportunity Tax Credit, the federal tax deduction for medical expenses, or the lifetime learning credit. In other words, to qualify for the WOTC, your employer must match any portion of the expense.
American Opportunity Tax Credit (AOTC)
For those of you who do not qualify for the WOTC, you may be eligible for the AOTC. You can receive the credit on up to $2,000 of qualified expenses per eligible child per tax year, per child. Qualifying expenses include tuition, fees, books, equipment, supplies and even transportation related to the child’s education.
Part Time Student & Military Tuition Credits
A tax credit of up to $2,000 per year can be provided for the cost of qualified undergraduate tuition (up to 100 percent) and qualified professional tuition (up to 50 percent) for employees who are enrolled at least half time in a college or university. The credit is available for the first four years of college, and $1,000 of the credit can be used for each school year beyond that. If you are enrolled in school full time, there is no upper age limit.
What is Tax Credit?
Tax credit is a reduction in income tax that can be claimed based on the amount of the eligible expenses. These benefits are significant and are especially attractive when compared to the alternative options such as increasing the earned income tax credit or eliminating the college tuition tax credit. The student and tuition tax credit can be used to reduce a household income by the full amount of the credit amount over the four-year period (for example, $8,000 per year, $16,000 per year, etc.) up to a maximum of $2,000 per year ($4,000 per year for a family with two children).
An eligibility for the student or employee must have at least one year of employment, excluding all deferral periods. However, it is important to note that if you had less than 10 years of continuous education that includes at least one year of post-secondary education, but not that includes at least one year of college or university education (or training) that resulted in a high school diploma, you are not eligible for this credit. If you do not qualify, then you can only claim the full value of the itemized deduction for your qualified expenses. For example, if you have a tuition credit of $2,000 but your taxable income is $50,000, you cannot claim the full amount of the deduction and your taxable income is therefore $50,000.
What is Incentives?
Incentives is a tax code designation that is designed to encourage and reward the investment of funds for specific purposes. For example, if you are considering buying a home and you are eligible for the mortgage interest tax deduction, you might also qualify for a government homebuyer tax credit. There are also tax credits for community organizations. For example, in 2013, about $8.1 billion in tax credits were claimed.
The IRS imposes an incentive of 50 percent of your qualified expenses. For example, if you purchased a new car and your tax bill is $5,000, and your new car is valued at $8,000, you may have to pay $4,000 of your tax bill in income taxes because of the new car incentive. However, if you qualify for the homebuyer tax credit, your tax bill is only $5,000. This means you only have to pay $2,000 in income taxes, making your entire $5,000 in additional expenses refundable to you as a tax credit.
Incentives are established every year for each program. They are not available for the same program in consecutive years. If you qualify for both, then you will have to pick one of them. If you choose to claim the incentive on your home purchases, you are not eligible to claim the tax credit. The IRS also has instructions on the programs that you can use to find out how much money you can get back on your tax returns.
What is Deductions?
Deductions are a reduction in income tax that can be claimed based on the amounts of the eligible expenses. Your taxable income is not reduced when you use the deductions because you pay taxes based on the dollars that you received, and not the dollars that you paid. Deductions are not only for the qualified expenses, they can also be used for eligible expenses not eligible for any deduction.
For example, if you buy an expensive, new car and your taxable income is $100,000, then you can only deduct $5,000 in expenses. However, you can get a $4,000 tax credit for making the purchase, so you can reduce your income tax by $4,000 and still claim the deduction.
What is the maximum amount of tax credit that you can get?
The federal income tax deduction and credit amount is based on your taxable income. But some states will tax certain items as income. When that happens, you can then be charged the tax that is on the item you bought when you are entitled to the full amount of the deduction and tax credit. Some states are much less forgiving of non-qualified purchases, meaning that you may not be able to claim the tax credit if your tax rate is higher than 9.85 percent.
Deductions are claimed based on the amount of the itemized deductions, even though your taxable income is lower. For example, if you are eligible for a mortgage deduction, you can deduct the amount of your mortgage interest on your taxes, even though you will not have to pay taxes on that amount.
Would you claim the deduction?
The option to take the deduction or the credit can seem pretty straightforward, but it is important to remember that each person must calculate the amount of the itemized deductions and take the applicable amount. It is important to understand the deduction and the tax credit are dependent on the size of the home and the amount of the itemized deductions.
The amount of the tax deduction and tax credit varies depending on the type of itemized deduction. One itemized deduction you can take is the state and local property tax deduction, which allows you to deduct state and local income and property taxes that you pay on your federal income tax return. The IRS has provided tax-deductible percentages of tax payments for property taxes, but they may not match up to the property’s actual value. Instead, they have suggested tax rates to be used to determine the deductible amount. You must use these estimated tax rates when calculating your tax deduction.
Of course, you could use the actual tax rate to calculate the amount of the deduction, but that could be very confusing if you have paid more taxes on a property than the number used. That is why you need to use the estimated tax rate that the IRS has provided. The federal income tax deduction and credit is based on your taxable income, so if you are entitled to a tax credit, the amount of your credit can also vary depending on your income tax rate.
To calculate the tax credit you can claim, you would only use the amount of your itemized deductions. The amount of your itemized deductions is based on your personal situation and a review of the IRS website. The amount of your itemized deductions should be less than the amount of the full amount of your itemized deductions. The IRS has also provided example amounts for the personal tax year, but you should calculate the amount based on your own situation.
Will you be able to use the home mortgage interest deduction in the future?
For homeowners who take advantage of the deduction, the deduction is not going away. That means that you can continue to make qualifying mortgage payments based on the interest that is covered by your deduction. The interest may be deductible each year, but it is not limited. However, with the new tax law, mortgage interest is no longer fully deductible for most new loans.
For a new homebuyer who purchases a home with a loan of $300,000 or less, the interest on the loan can still be fully deductible, but it cannot be carried forward or includible as a deduction in the future. However, for existing homebuyers who purchase a home with a loan of $750,000 or less, the mortgage interest on the loan may still be fully deductible, but the amount that can be fully deductible is subject to the home mortgage interest deduction limits.
While there are many new changes to the tax code, you do not need to wait until you file your taxes to learn more about these changes. A local accountant or certified public accountant can talk to you about your individual situation and the changes in the tax law so that you understand what you can expect.
It is easy to understand what will and will not be deductible with the new tax law. Although there are lots of changes that impact homeowners, keeping the information that you know from last year in mind will help you understand how the new tax laws may affect you.
How Tax Credit, Incentives, and Deductions Are Related What One Another?
Also, as I have mentioned earlier, tax credits and deductions are related. If you are eligible for a tax credit or incentive, your tax return could also be subject to a deduction or credit. The amount that you can claim on your tax return is based on your income. If you have tax savings because of the deduction or credit that you are able to claim on your tax return, then you could also be able to claim a tax credit. In order for the itemized deductions to be deductible, the itemized deductions must be included in your income and therefore can be subject to a tax credit or deduction. In order for a tax credit or deduction to be available, the IRS has determined that the income from the itemized deductions has been correctly reported.
Conclusion
In summary, just like the Taxpayer Bill of Rights, there are changes that have come with the new tax code. The good news is that although some of these changes could have a significant impact on your personal financial situation, you do not have to wait until April 15, 2023 to see what the impact is and how your situation may be affected. When it comes to changes that impact you, understanding what will be impacted and how you can make the changes, as detailed above, is important.
Tax Credit, Incentive, and Deduction are one of the many changes that are outlined in the Taxpayer Bill of Rights (TABOR). Tax Credit, Incentive, and Deduction can be found at https://www.irs.gov/uac/tax-credit-deduction-benefits. Hope this helps!