It’s almost tax season, everyone’s least favorite time of year. Getting them done right the first time can feel like a huge burden on your shoulders. It doesn’t feel like much of a reward to keep the IRS off your back but you might look at things differently if you realize that there are some tax credits that you’re eligible for.
Instead of burdening your accountant with more questions as to what tax credits you could be receiving, here’s a handy guide to figuring out what those are and whether you qualify for them. You may end up getting more money back than you realize.
Keep in mind that these tax credits are determined on a person-to-person basis so you may not qualify for all of the tax credits that are mentioned here.
Tax Credit or Tax Deduction?
These terms can be confusing but it’s important that you don’t confuse the two. They seem to serve the same purpose in the end, but a tax credit and a tax deduction affect two very different things.
A tax credit is a reduction of your overall tax bill at the end of the year. Some credits are even refundable, meaning that if you owe taxes but the credit is more than what you owe, you’ll receive a check of the difference. Be aware that there are very few tax credits that are actually refundable, however. A credit reduces your tax bill.
A tax deduction, on the other hand, is a sum that the IRS allows you to subtract from your adjusted gross income for the year so that your taxable income and tax bill are lower. A deduction reduces your taxable income.
In general, this is dependent on what the annual gross income is.
Any individual who is earning less than £14,000, any couple earning less than £19,000 and anyone with children who is earning less than £40,000 is eligible for some kind of tax credit.
Keep in mind that tax credits are examined on a person-to-person basis, so even if you fall into one of these categories, you may still not be eligible for a tax credit.
Working Tax Credit
This tax credit is designed for those who are working but are still taking in a low income. It is meant to supplement your earnings so that you can have a livable wage to work with. Any change in circumstance should be brought to the attention of your tax credit office, including:
- having children
- working less than 16 hours per week
- losing a job
They will take into account your circumstances and see what they can do to help you out. Both employed and self-employed individuals may qualify and will receive a minimum of £1,960 per year.
Other elements are taken into account as to whether this amount is supplemented, such as whether you have children, have a disability, how many hours you work, and whether you are paying for childcare. An individual or couple may be able to claim as much as 70% of their childcare costs on their tax credit.
So who qualifies? In regards to income, it is any individual who is earning less than £13,100 or any couple who is jointly earning less than £18,000, as long as they are over the age of 25, have no children, and have no disabilities. Anyone earning income over this amount does not qualify for the tax credit.
Under some circumstances, you may be able to claim the Working Tax Credit for periods when you’re not working. In order to qualify, you must prove that you have been paid for work already done, you have been working the right number of hours before your gap in employment began, and that you’ve got Statutory Sick Pay or the equivalent if you were on sick leave.
Of course, there are different time periods that are covered by the credit, depending on your circumstances.
- Lose your job or you were laid off from work: 4 weeks
- Maternity leave: the first 39 weeks of your leave
- Paternity leave: the period of time of leave granted by your employment
- Additional paternity leave: up to the 39th week of your partner’s leave
- Work gap due to illness: up to 28 weeks
- You go on strike: the first 10 days
- Suspended from work: the period of suspension
If you’d like to find out more as to whether you qualify for the Working Tax Credit, you should check out this page.
Child Tax Credit
The Child Tax Credit is to help those who are raising children under the age of 16 or children between the ages of 16 and 19 who are in full-time education (not university).
Support is provided to the first two children that an individual has; this does not apply to those who have multiple-birth children (twins, triplets, et cetera) or those who have adopted children. However, anyone with three or more children will not be able to claim the family element and receive the Child Tax Credit.
Being able to qualify for the Child Tax Credit is also dependent on your annual income and whether you have childcare costs or not. Your annual income has to be up to £16,105; anything over this amount will reduce the amount of tax credit you receive.
If you’d like to figure out how much you could be receiving each year for the Child Tax Credit, you should check out the Tax Credits Calculator to receive a rough estimate of how much you qualify for.
Hopefully, this article has dissuaded any further concerns you may have about tax credits and how you may be able to qualify.
With the right amount of patience and examining your own income numbers carefully, you could end up saving a lot more money each year than you previously realized.
And if you’re still confused about the process, don’t be afraid to seek the help of a professional to discuss your eligibility for any tax credits.
Are you using these tax credits to your advantage?