Hey Philly, don’t ‘leave money on the table.’ Here’s some tax credits you might claim

It’s a month until Tax Day, and you may still have questions about which tax credits you can take advantage of this year.

If you do, don’t beat yourself up: Even for tax professionals, it can be difficult to figure out which credits for which they qualify.

“It is very easy to miss them,” said Steven Balsam, an accounting professor at Temple University’s Fox School of Business and a site coordinator for Volunteer Income Tax Assistance (VITA) program sites at the university’s main and Ambler campuses. “I have to admit that for a number of years I missed a local credit … because I just didn’t know it existed.”

Sometimes when people do their taxes themselves, they “leave money on the table, because they don’t ask themselves the questions or they don’t head down the right rabbit hole,” said Lisa Mazzola, president of accounting firm Mazzola & Company in the city’s Olde Kensington neighborhood.

To help demystify tax credits, The Inquirer asked these tax return preparers to break down the basics, explain some of the most common credits their clients qualify for (including ones they often miss), and offer other tips based on what they’re hearing this tax season.

What is a tax credit?

A tax credit provides a dollar-for-dollar reduction in the amount of money you owe the IRS, or increases your refund.

Balsam likes to use the Earned Income Credit — a refundable credit we’ll explain more about below— as an example.

“If you owe taxes, it will reduce the amount you owe,” he said. “If you don’t owe taxes, you’ll get a check in the mail, or even better a direct deposit.”

And a tax credit could generate a return when you otherwise would not have gotten one.

“Let’s say you owed $1,000 and you get the average credit, which is $2,000,” Balsam said. “You’ll actually get a check back for $1,000.”

A tax credit differs from a tax deduction, which is subtracted from your amount of taxable income and reduces the amount you owe indirectly.

What are the different kind of tax credits?

There are three different kinds of tax credits: refundable, nonrefundable, and partially refundable.

Refundable credits are the best kind. They not only can reduce the amount of tax owed to $0, but they can also result in a refund if there are credits remaining.

Nonrefundable credits can reduce the amount of tax owed to $0, but any remaining credits are not paid out as a refund.

Partially refundable credits can reduce your amount of tax owed to $0. If there are credits leftover after that, it can result in a refund of as much as 40% of the credit.

Is there anything I should know about how tax credits have changed this year?

Due in part to the Inflation Reduction Act, “taxpayers should be aware that they’re going to receive an especially smaller refund compared to last year,” said Mazzola, who prepares about 200 tax returns for individuals and small businesses.

While taxpayers across the board will see smaller refunds, people with children will be particularly affected by the reduction to the child tax credit. In tax year 2021, under the American Rescue Plan, the credit jumped to $3,600 for children under 6, and $3,000 for children 6 to 17. For tax year 2022, it was reduced back to $2,000 for children up to 16 years old, with 17-year-olds excluded.

What tax credits am I most likely to qualify for?

Balsam and Mazzola said the following as the most common tax credits among Philadelphia-area taxpayers:

Earned income tax credit: If you have worked and earned income under $59,187, and have investment income below $10,300 in tax year 2022, you may qualify for this refundable credit of between $600 and $7,430.

Child tax credit: If you have a child under the age of 17 who has lived you with for at least half the year and who provides no more than half of their own financial support, you may qualify for this partially refundable credit, which can be worth as much as $2,000 per child ($1,500 of which is refundable). To qualify, your annual income must not be more than $200,000, or $400,000 if filing jointly.

Retirement Savings Contributions Credit: “A lot of people miss this,” Mazzola said, but low-to-moderate-income non-student and non-dependent taxpayers could be eligible for this nonrefundable tax credit. To qualify, you must make no more than $68,000 for a married couple filing jointly; $51,00 for a head of household, and $34,000 for all others. Depending on your income and filing status, the credit can amount to 50%, 20% or 10% of the first $2,000 you contribute to your retirement account.

American Opportunity Credit: This partially refundable credit is available to eligible students (you, your dependent, or spouse) enrolled in a college, university, trade school, or other post-secondary institution for the first four years of higher education. To claim the full $2,500 credit, your modified adjusted gross income (MAGI) has to be no more than $80,000, or $160,000 for those married filing jointly. You cannot claim it if your MAGI is more than $90,000, or $180,000 for joint filers. Up to $1,000 of the credit may be refundable.

Lifetime Learning Credit: This nonrefundable credit can go toward paying for undergraduate, graduate, and professional degree courses or job trainings for an unlimited number of years. It has the same income parameters as the American Opportunity Credit, phasing out between $80,000 and $90,000 (or between $160,000 and $180,000 if you file jointly), and is worth up to $2,000.

What about eco-friendly tax credits, such as for solar panels or electric vehicles?

Mazzola has yet to hear any questions about energy credits this tax season. She said she suspects this is because the Inflation Reduction Act is set to expand some of these incentives beginning this tax year.

“Those tax credits really kick in in 2023,” she said. “Any expenses for environmentally friendly improvements to your home, and of course the electric-vehicle credits, are going to be much higher in 2023.”

“So I’m not seeing [questions] so much this year, because the old limits are still in place that most people used up years ago,” she added. “But come 2023, those credits are going to skyrocket.”

At VITA sites at Temple’s main campus and its Ambler location, “we do get a client or two every week that is asking about energy credits. Nobody has asked about the electric car yet,” said Balsam, who works on tax returns, free of charge, for about 500 low-to-moderate-income people each year through the IRS program. “Our clientele usually cant afford those cars or solar panels.”

If you did install solar panels on your home this tax year, you could be eligible for up to 30% of the cost of installation, with no income requirements.

Some new electric vehicle owners could also be eligible for nonrefundable credits of between $2,500 to $7,500, but there are limitations, including the car’s weight and battery capacity. The vehicles also must have gone through final assembly in North America. GM and Tesla cars are ineligible because of how many the manufacturers have sold.

This credit is set to expand beginning in tax year 2023: Tesla and GM owners will be eligible for a credit, as will owners of used electric vehicles. There are set to be income limits, as well, of $150,000 and $300,000, for new car owners.

Where can I learn more about tax credits?

The IRS lists tax credits and deductions at irs.gov/credits-deductions-for-individuals. Balsam also trusts the information put out by reputable sites such as TurboTax and H&R Block.