Tax credits are one of the most effective ways to reduce your tax liability. Unlike deductions, which lower your taxable income, tax credits reduce the amount of tax you owe dollar-for-dollar. While many people are familiar with standard credits like the Earned Income Tax Credit or the Child Tax Credit, there are several lesser-known credits that individuals and businesses often overlook. Here’s a look at some of these hidden gems that can help you save more on your taxes.
1. Saver’s Credit (Retirement Savings Contributions Credit)
Planning for retirement is crucial, and the Saver’s Credit is an excellent incentive for low-to-moderate income taxpayers to contribute to their retirement accounts. This credit rewards those who contribute to an IRA, 401(k), or similar retirement plans by offering a tax credit of up to 50% of the first $2,000 contributed.
Who’s Eligible?
- Taxpayers 18 or older, not full-time students, and not claimed as dependents on another person’s tax return.
- Income limits apply and are adjusted annually. For 2023, for instance, the income limit for married couples filing jointly is $73,000, and for single filers, it is $36,500.
This credit can be a great way to reduce your tax burden while simultaneously boosting your retirement savings.
2. Lifetime Learning Credit
If you’re pursuing additional education, either for personal growth or career development, the Lifetime Learning Credit (LLC) can help reduce the financial burden of tuition and related expenses. This credit offers up to $2,000 per year for qualified education expenses, including tuition, fees, and even books.
Who’s Eligible?
- Unlike the American Opportunity Tax Credit, the Lifetime Learning Credit is available for individuals enrolled in eligible educational institutions, regardless of whether they’re pursuing a degree.
- The income limit for this credit is $80,000 for single filers and $160,000 for married couples filing jointly.
The best part about this credit is that it can be used for unlimited years, unlike other education credits with limited eligibility periods.
3. Work Opportunity Tax Credit (WOTC)
Businesses that are looking to hire can take advantage of the Work Opportunity Tax Credit (WOTC). This credit is designed to encourage employers to hire individuals from specific target groups, such as veterans, ex-felons, and individuals on long-term unemployment, providing an incentive to diversify the workforce.
How Does It Work?
- Employers can receive a credit of up to $9,600 per new hire, depending on the target group of the employee and how many hours they work.
- Businesses of any size are eligible, and the credit applies to both part-time and full-time hires.
By making strategic hiring decisions, businesses can save on taxes while supporting employment in underserved populations.
4. Energy-Efficient Home Improvement Credit
The push for more energy-efficient homes has led to several tax incentives. The Energy-Efficient Home Improvement Credit is one such credit designed to encourage homeowners to invest in energy-saving upgrades like installing solar panels, energy-efficient windows, or improving insulation.
How Does It Work?
- The credit is worth up to 30% of the cost of qualifying home improvements.
- The credit applies to installations like solar energy systems, wind turbines, and geothermal heat pumps.
If you’re planning to make energy-efficient upgrades to your home, this credit can help offset the upfront costs while also reducing your future energy bills.
5. Disabled Access Credit
Small businesses often overlook the Disabled Access Credit, which provides incentives for making their workplaces more accessible to individuals with disabilities. This credit is available for small businesses that incur expenses to remove physical, communication, or transportation barriers for disabled employees or customers.
What Qualifies?
- The credit can cover up to 50% of eligible expenses, up to a maximum of $10,250, which means you can receive a credit of up to $5,000.
- Expenses may include installing ramps, modifying restrooms, providing accessible parking, or offering assistive technology.
For small businesses, this is an excellent way to make a workplace more inclusive while also taking advantage of tax savings.
6. Credit for Small Employer Pension Plan Startup Costs
If you’re a small business owner and you’ve been hesitant to start a retirement plan for your employees due to high startup costs, the Credit for Small Employer Pension Plan Startup Costs can help alleviate that financial burden.
What’s the Benefit?
- Eligible small businesses can receive a credit of up to 50% of the startup costs related to establishing a new retirement plan, such as a SIMPLE IRA or a 401(k), up to $5,000 per year for the first three years.
- This credit is designed to encourage small businesses to offer retirement plans to their employees, which can improve employee retention while offering tax savings.
7. Adoption Credit
Adopting a child can be an expensive process, but the Adoption Credit offers financial relief for those adopting a child. This credit allows taxpayers to claim expenses related to the adoption process, including legal fees, court costs, and adoption fees.
Who’s Eligible?
- In 2023, the maximum adoption credit is $15,950 per child. This is a non-refundable credit, meaning it can only reduce your tax liability, but it can be carried forward for up to five years if not fully used in the year the adoption is finalized.
- There are income limits for this credit, with phase-outs beginning for individuals with modified adjusted gross incomes above $239,230.
The adoption credit is a valuable resource for adoptive parents, helping to ease the financial burden of expanding their family.
Don’t Miss Out on Tax Savings
Many individuals and businesses miss out on significant tax savings simply because they aren’t aware of these lesser-known tax credits. By taking advantage of the Saver’s Credit, Lifetime Learning Credit, Energy-Efficient Home Improvement Credit, and others, you can reduce your tax burden and improve your financial situation. Whether you’re planning for retirement, expanding your business, or making your home more energy-efficient, these credits can offer meaningful relief during tax season.
If you’re unsure which tax credits you qualify for or need help navigating the complexities of tax planning, our team of professionals is here to assist. Contact us today to ensure you’re taking advantage of every available credit and maximizing your tax savings.
