What a wild weekend of weather. My teamâs condolences go out to the families impacted in Missouri, Alabama, Arkansas, Kansas, Oklahoma, Mississippi, Texas, and California. Itâs only mid-March, and tornado season is already here.
And April comes after March. Which means the April 15th deadline is coming up fast. Youâve got less than a month now to file (or, to file an extension, if it comes to that). We can still make room for you, if you schedule an appointment now:
719-260-0320
But my calendar is getting pretty near booked up â and I would hate to see you miss your window to secure the most tax savings you can just because life got in your way.
Because savings opportunities arenât always abundant (or reliable). For example, if youâre planning on flying with Southwest Airlines for your summer travels, you just lost a big one: Starting May 28, theyâll no longer check bags for free.
Which might have you rethinking your travel budget (or searching for a more budget-friendly airline). Pivoting when changes like this happen isnât fun. But itâs necessary.
Good financial strategy means youâre taking a good look at all your options, weighing them against each other, and making the best choice you can with what you know.
So, even though it just got tougher to save on airlines, thereâs another place you can (and should) focus on securing savings right nowâŠ
Refundable & Nonrefundable Tax Credits Can Help Colorado Springs Taxpayers Save
“Wealth is the ability to fully experience life.â â Henry David Thoreau
If youâre like a lot of Colorado Springs taxpayers, you probably hear âtax creditsâ and think, free money!
And you would be right⊠at least mostly.
But tax credits are really much more nuanced than that. And understanding those nuances could be what saves you from getting a smaller-than-expected refund, or finding out you actually owe the IRS.
So, what are the different types of credits that concern you?
Nonrefundable tax credits: use it or lose it. A nonrefundable tax credit reduces the amount of tax you owe, but if your tax bill is already zero, it does nothing for you. The value is cut off at your income tax liability. For example, letâs say you owe 1.5K in taxes, but you qualify for a 2K Lifetime Learning Credit. Youâll only get a 1.5K deduction â and youâll never see that extra 500 dollars.
Most tax credits fall into this category, like the Saverâs Credit, the Foreign Tax Credit, and the Child and Dependent Care Credit.
Refundable tax credits: payday from Uncle Sam. If the credit exceeds what you owe, the IRS refunds you for the difference. Letâs say, for instance, you owe 1.5K in taxes but you qualify for the Earned Income Tax Credit (EITC) worth 3.5K. The IRS would then wipe out your tax bill and send you a 2K refund.
Credits in this category that you might qualify for include the EITC, the Additional Child Tax Credit (ACTC), and the Premium Tax Credit.
Partially refundable tax credits: the third wheel. Some credits split the difference â part reduces your tax bill, and part is refundable if you donât owe taxes. The Child Tax Credit is a good example of this. Itâs worth up to 2K per child, but only 1.6K of it is refundable. It will reduce what you owe first, and youâll receive anything remaining as a refund.
Another popular fence-sitter is the American Opportunity Tax Credit (AOTC), which is 40 percent refundable up to 1K.
Which oneâs better?
Like most things when it comes to your taxes, it depends. Refundable credits might be a better option for you if youâre lower-income, because you can get a refund even if you donât owe taxes.
If youâre a higher-income filer, on the other hand, you could see greater benefits from nonrefundable credits. You likely owe taxes, and you can use these credits to lower your bill. The Savers Credit has income limits youâll need to be within, but the other nonrefundable credits I listed donât impose income limits.
Or, you can go for both if you qualify. Just make sure to apply refundable credits last so you maximize their impact.
How to be credit smart
To make sure youâre taking full advantage of the credits available to you, hereâs what youâll need to do:
- Do a comprehensive financial review. Review your income and expenses, and estimate your tax liability so you know whether to adjust your withholding or quarterly tax payments. And think about any life changes that would affect your credit eligibility.
- Understand your credit eligibility. Check that you donât exceed income thresholds for the credits you want to claim. Also, check that your filing status is optimized â married filing jointly typically gets you the most credits, and filing as head of household if youâre single could get you lower tax rates and higher EITC income thresholds. If youâre in school, see if you qualify for the AOTC or Lifetime Learning Credit.
- Plan for credit phaseouts. Try to reduce your taxable income to stay within income thresholds. For example, if you land just above a phaseout range, consider deferring income, increasing 401(k) contributions, or making deductible IRA contributions.
- Strategically apply your credits. Use nonrefundable credits first to lower your tax bill, then apply refundable credits to get the highest refund possible. If a credit phases out next year, take action on claiming it now.
- Keep good records. Save things like your W-2s, 1099s, tuition statements (1098-T), receipts, tax documents, and childcare expense records. Because if youâre claiming credits like the EITC or education credits, the IRS is going to ask for documentation (and they can audit you if you donât have it).
And if youâre now realizing you missed a credit and youâve already filed, you can still snag it. You have up to three years after filing to amend your return with Form 1040-X.
Itâs worth looking back to see if you left money on the table in past years, even if you donât remember doing so. A lot of my North Colorado Springs clients have missed the EITC or ACTC in years past because they didnât realize they qualified.
I know weâve trekked deep into the swamps of tax technicalities here, but this really will make a difference on your tax return this year (and years to come). Because being credit-savvy will ultimately help you keep more money in your pocket â which is what my team and I are all about.
So, if you want help figuring out your best credit strategy (and making sure you donât miss any) this tax season, just grab a time on my schedule. (And do it now, because my schedule is filling up quick):
719-260-0320
Here to help,
Susan Wilklow