Tax credits are some of the most valuable tools around to help cut your tax bill. But figuring out how to use these credits on your tax return can get complicated very quickly. Here’s what you need to know.
Understanding the difference
To help illustrate the difference between a credit and a deduction, here’s an example of a single taxpayer making $50,000 in 2024.
Tax Deduction Example: Savi Lesse earns $50,000 and owes $5,000 in taxes. If you add a $1,000 tax deduction, she’ll decrease her $50,000 income to $49,000, and owe about $4,800 in taxes.
Result: A $1,000 tax deduction decreases Savi’s tax bill by $200, from $5,000 to $4,800.
Tax Credit Example: Now let’s assume Ima Smart has a $1,000 tax credit instead of a $1,000 tax deduction. Ms. Smart’s tax bill decreases from $5,000 to $4,000, while her $50,000 income stays the same.
Result: A $1,000 tax credit decreases Ms. Smart’s tax bill from $5,000 to $4,000.
In this example, your tax credit is five times as valuable as a tax deduction.
What you need to know
Credits are generally worth much more than deductions. There are several hurdles you have to clear, though, before being able to take advantage of a credit. To illustrate these hurdles, consider the popular child tax credit.
Hurdle #1: Meet basic qualifications. You can claim a $2,000 tax credit for each qualifying child you have on your 2024 tax return. The good news is that the IRS’s definition of a qualifying child is fairly broad, but there are enough nuances to the definition that Hurdle #1 could get complicated.
Hurdle #2: Meet income qualifications. If you make too much money, you can’t claim the credit.
Hurdle #3: Meet income tax qualifications. To claim the entire $2,000 child tax credit in 2024, you must owe at least $2,000 of income tax.
Take the tax credit…but get help!
The bottom line is that tax credits are usually more valuable than tax deductions. But tax credits also come with many rules that can be confusing. It’s always best to get help.
If you are concerned about protecting your valuables, here are several suggestions to consider for protecting them from would-be thieves:
Rent a safe deposit box. It may make sense to keep seldom worn jewelry, coins and other important documents in a traditional safe deposit box at your local bank. But beware if you go this route, as it’s often inconvenient to retrieve your valuables, as well as easy to forget what is in the box and who has the key. Plus it’s important to fully understand your rights under the contract terms.
Install a home safe. There are several types of in-home safes you can choose from, including wall, floor, free standing, fire and gun safes. There are also diversion safes for small items that are designed to look like everyday household objects that can blend in with its surroundings.
Secure your house. In addition to installing a state-of-the-art home security system, there are several other ways to physically secure your home. Consider updating your locks every several years, and remember to actually use them! Many burglars are looking for easy targets, and unlocked doors and windows provide easy access. Also consider reinforcing your doors and windows, and installing motion-sensing lights both inside and outside.
Be prepared if a theft does occur
Thieves can still unfortunately steal your valuables despite multiple layers of protection. Here are some suggestions to prepare you if any of your valuables go missing:
Be familiar with your insurance policy. Read your insurance policy to know what items are covered. Review your policy once a year or whenever you acquire another valuable asset.
Get an appraisal. It may be difficult to know how much insurance you need without a proper valuation of your assets. Some assets may be worth much more than you think, while other assets may be difficult to pinpoint a value without professional assistance.
Keep a home inventory. Create a list of all your valuables that includes photographs and purchase receipts. If an asset is stolen, having an up-to-date inventory list and documentation can help quickly jump-start filing an insurance claim.
Negotiating to decrease or zero out a credit card bill or other loan balance can help relieve a tough financial situation, but it can also give way to an unexpected tax bill. Here’s a quick review of various debt cancellation situations and how they impact you and your taxes.
Consumer debt. If you have a credit card balance or loan forgiven, be prepared to receive IRS Form 1099-C representing the amount of debt cancelled. The IRS considers that amount taxable income to you, and they expect to see it reported on your tax return. However, if you’ve filed for bankruptcy or have liabilities that exceed your assets, then you may not need to report a cancelled debt as taxable income.
Primary home. If your home is short sold or foreclosed and the lender receives less than the total amount of the outstanding loan, expect that amount of debt cancellation to be reported to you and the IRS. But special rules allow you to exclude up to $2 million in cancellation income in many circumstances. You’ll need to fill out paperwork to report this special homeowner exclusion to the IRS, but the end result can be a generous tax break for you and your family.
Student loans. While this topic has generated plenty of recent headlines, the basics of student loan forgiveness have remained essentially the same. If your school closes while enrolled or soon after you withdraw, you may be eligible to discharge your federal student loan and not include the forgiven amount as taxable income. And if you are able to take advantage of the recent student loan forgiveness provision under the American Rescue Plan Act of 2021, your cancellation may be exempt from federal tax. The challenge, though, is that recent forgiveness programs are still being challenged in court AND your state may still wish to tax the loan forgiveness.
Second home, rental property, investment property, & business property. The rules for debt cancellation on second homes, rental property, and investment or business property can be extremely complicated. Given your cost of these properties, your financial condition, and the amount of debt cancelled, it’s still possible to have this debt cancellation taxed at a preferred capital gains rate, or even considered not taxable at all.
Each of these themes have one thing in common – the tax laws can be complicated and you will probably need help navigating your situation.
Small payments can save you big money when paying off your mortgage.
With 30-year fixed rates reaching levels not seen in 25 years, adding even just a little extra to your monthly payment can significantly cut down on the interest you pay over the life of your mortgage.
Here are several different scenarios to illustrate how much interest you can save by slightly increasing each monthly payment.
Base scenario and assumptions
Here’s the assumptions used for this base scenario:
Average U.S. home price ($420,800) and mortgage rate (7.50%) for early 3rd quarter of 2024
Average U.S. downpayment of 10%
House financed using a 30-year fixed rate mortgage
Monthly payment includes principal and interest payments only; it does not include other expenses typically bundled with monthly payments, such as property taxes, homeowners insurance, and mortgage insurance premiums
With no additional money tacked on to your monthly payment, you would pay $574,583 in interest over the course of your 30 year mortgage in this base scenario.
To buy this house for $420,800, you would end up paying just shy of $1 million after adding $574,583 of interest charges!
None of us wants to pay $1 million for a $420,000 house. So let’s take a look at the following scenarios to find out how much interest expense you can save by increasing your monthly payments by a small amount.
Here’s a summary of the base scenario’s assumptions compared with how much interest you can save, and how much faster you’ll pay off your mortgage, in each of the following examples.
Example #1: An Extra $100 Per Month
Adding an extra $100 to your monthly mortgage payment would save you $81,902 in interest expense and cut down on the time to pay off your mortgage by 3½ years.
Example #2: An Extra Lump-Sum at Years 5, 15 & 25
In this example, let’s assume you make an additional lump-sum payment of $5,000 in years 5, 15, and 25 of your mortgage.
While you wouldn’t save that much extra time paying off your mortgage in this scenario, you’ll still end up pocketing nearly $37,000 just by making three lump-sum payments over the course of your mortgage.
Example #3: An Extra $200 Per Month
If you can afford an extra $100 per month to put towards your mortgage, why not try for $200 a month? This is where the math starts to get fun. Adding $200 a month helps pay off your mortgage 6 years sooner and saves you $140,000 in interest expense.
Every little bit helps
Even adding an extra $10 per month can save you nearly $10,000 over the course of your mortgage. That’s a lot of money that goes into your bank account instead of your bank’s bank account!
Paying off your mortgage early and cutting down how much interest you pay over the course of your mortgage doesn’t require a lot of money. Whether it’s $100 or $10 a month, every little bit can help on your quest towards a better financial future for you and your family.
It’s easy to feel secure about the money you deposit with a bank you’ve come to trust. After all, most banks and credit unions offer certain levels of protection against fraudulent transactions.
Banks, however, won’t protect you against all types of fraud.
Here’s a look at the protections that banks and credit unions usually provide to their customers – and which situations where you’ll likely be on your own.
When a Bank Usually Protects You
For credit cards, banks usually provide zero liability on any unauthorized charges.
Debit cards also provide protection against fraudulent purchases, but there may be limitations depending on which financial institution issued your card. According to federal law, here is the maximum amount of fraudulent transactions you’ll be responsible for depending on when you notify your bank that your card is lost or stolen:
Immediately notify your bank before any unauthorized charges are made: Zero liability
Within two business days: Up to $50
After two business days but within 60 days: Up to $500
Fail to notify within 60 days: Unlimited
When a Bank Usually WON’T Protect You
Unfortunately, there are many types of scams that banks won’t reimburse you for if someone steals your money. Here are some of the more common scams:
You are scammed into moving money out of your account and into another person’s account.
A hacker uses lies to convince you to make a bank transfer into a cryptocurrency wallet.
You liquidate your retirement funds and send the money to someone else for any reason, even if you were conned into it.
You make a person-to-person transfer to another individual using an online payment app, and that transfer doesn’t come with any type of purchase protection.
How to Protect Yourself from Common Banking Scams
Here’s how to protect yourself from getting scammed:
Don’t communicate about your accounts unless you initiate the conversation. If someone calls about your bank account, hang up and call the financial institution directly using your normal means of contact.
Never share your information. Don’t share account details or personal information online or over the phone, especially if you were asked to share these details in a phone call you didn’t initiate or via email.
Tell someone. Scammers try to isolate you from family members and friends. If you’re unsure about a banking transaction you plan to make, or you wonder if you’re being victimized, tell someone you trust about the situation.
Ask your bank for help. Bank tellers are trained to spot the early signs of fraudulent transactions. If you’re making a bank transfer and feel unsure about the situation, explain it to a teller or bank representative and ask for their help.
Report the incident. Whether you unfortunately got scammed or you spotted the attempted scam before withdrawing any money, submit a report of the situation by visiting ReportFraud.ftc.gov.
Meetings, phone calls, emails, text messages, and water cooler conversations with your employees constantly bombard you as a business owner. Freeing up 15 minutes a day could dramatically improve both your workflow and peace of mind.
Here are some ideas for getting back 15 minutes every day:
Use your phone. Whenever possible, use your phone instead of email. Oftentimes talking with someone directly is more efficient than spending the time to compose an email. Plus, email chains can fill your inbox and require precious minutes to read and decipher. Using the phone can also help avoid potential misunderstandings, as a person’s tone of voice conveys information that may be lost or misinterpreted when shared via a written message.
Be brief with emails. Many tech entrepreneurs are known for their brief emails that consist of only several words. In situations where you do use email, consider crafting a response that is only several words in length. And remember the golden rule of emails: send fewer emails to receive fewer emails.
Plan your meetings. Face-to-face time with colleagues, vendors, and customers is often productive and essential for growing a business. On the other hand, meetings can be a huge waste of time if not properly planned. Establish clear goals for a meeting in advance so your team can focus on priorities and get back to work.
Minimize distractions. Business owners enjoy developing a rapport with their employees. These personal conversations, however, need to have boundaries so that both you and your employees can stay on task. Tell your team if there’s a day you don’t have time for small talk. Consider putting an old-fashioned Do Not Disturb sign on your door when you need to get things done.
Delegate when possible. If you’re a small business owner who built a company from scratch, you may be reluctant to relinquish control over day-to-day operations. But failure to delegate can sap time from more important tasks like planning, building relationships with key vendors, and growing your customer base. So develop a plan to train your employees to assume more responsibility over time.
Fifteen minutes may not seem like much, but a busy business owner can work wonders with just a little more time every day.
IRAs can be a powerful tool to lower your taxes while helping you save for retirement. Here are 5 little-known opportunities about IRAs that can help you and other family members save even more when contributing your IRAs.
A nonworking spouse can have an IRA. If your spouse doesn’t work, you may still be able to open and contribute to an IRA for your spouse, assuming that you work and file a joint tax return. This can be a great way to help reduce your taxable income each year.
Even children can have IRAs. If your child has earned income, you can open and contribute to an IRA. Just make sure you can document the earnings. While your child can contribute their own earnings, many parents will help keep track of things like babysitting money, then match those earnings in either a traditional or Roth IRA. Often the Roth IRA is preferred, because the future earnings could be tax free! Your child’s IRA is managed by an adult until the child is old enough for the account to be transferred into their name.
You may still contribute to an IRA if you have a 401(k) or similar program at work. As long as you do not exceed the income limits, you can have both an IRA as well as other types of retirement savings plans.
Non-deductible contributions may be made. If you exceed certain income levels, contributions to your IRA won’t be able to reduce your taxable income for the year. But you may still want to make after-tax contributions to a non-deductible IRA, as the earnings can still grow tax-deferred.
It’s not just for retirement. With traditional IRAs, if you withdraw funds before the age of 59 1/2 you may be subject to income tax AND an early withdrawal penalty. But there are exceptions to this rule, including withdrawals for a first time home purchase, major medical bills, college costs, birth and adoption expenses, and others. However, it is important to know the rules BEFORE you withdraw the funds.
Tax rules surrounding IRAs are vast and complex. But within the rules are numerous situations that if you know they exist, can help you plan for a more tax-efficient future.
In our fast-moving world, using concise yet descriptive words and phrases can be very powerful when communicating important thoughts and ideas.
While the term can incite eye-rolls if overused, certain words and associated phrases can be helpful as a communication tool when you don’t have the time for an in-depth conversation. Here are some of the latest business buzzwords to help you expand your professional vocabulary or better understand them when thrown at you.
Headwinds & Tailwinds. Headwinds are outside factors that get in the way of where you want to go. They can be macroeconomic factors like interest rates, or can be closer to home such as new regulations in your industry. Tailwinds are positive factors that help move something in a better direction for you, like a competitor getting out of the market or demand increasing for your product. It’s like riding your bike on a windy day – it’s out of your control, but riding is so much easier with the wind at your back than in your face.
Forcing Function. Ever get stuck in the middle of a project or have delays caused by someone not doing their part? A forcing function is a secondary action or factor related to the activity you are trying to accomplish that forces resolution or a decision. An example is an expiration date on a sales proposal. The date is the forcing function to ensure a decision is made on the proposal. This prevents the proposal from lingering indefinitely.
Ecosystem. In business, an ecosystem is the collective group of people and organizations that comprise a given industry. To be in the ecosystem, an organization needs to have an impact on everything else within that ecosystem. For example, the tax preparation ecosystem is made up of clients, tax preparers, the IRS, state & local tax authorities, suppliers, and competitors. If something changes with anyone in this ecosystem, everyone involved is impacted in some way. To be successful in any industry, you need to understand the specifics that drive behavior in your industry’s ecosystem.
Table Stakes. Like many business buzzwords, table stakes is a term first popularized at the poker table before finding a similar application elsewhere. It refers to the minimum functionality or service delivery that is expected for an offering in a given industry. Take streaming services like Netflix, for example. Table stakes include 24/7 access, original content, and subscription tiers. Without these features, a streamer’s market share would quickly diminish.
Value Proposition. Often referred to as a value prop for short, a value proposition is a concise statement that explains the value a business provides its customers, often in comparison with their competitors. It’s essentially an elevator pitch designed to get a prospective customer interested in the business. Without a solid understanding and communication of the business’s value proposition, all other benefits the company can offer may go by the wayside. So it’s very important to get this right.
While the business buzzwords presented here are general in nature, the ones you use may be industry- or tool-specific. So be aware of the buzzwords you use on a regular basis and make sure your audience also fully understands their meaning.
If someone asks what your most valuable asset is, your answer might be your house, vehicle, or investment portfolio. But there’s another answer to this question that’s worth considering – yourself.
As you seek out opportunities to increase the value you bring to the table both in your personal and professional life, here are some ideas.
Meet one new person each week. Research shows that up to 85% of workers land a new job through networking. In other words, who you know may be more important than what you know. Consider expanding your network and potential job prospects by meeting someone new in your industry, or a related industry, each week.
Learn a complimentary skill. This will help you create meaningful points of difference that you bring to the table every day. For instance, if you’re an engineer, learn how to be a better writer. If you’re a marketing executive, consider taking finance and accounting courses. Or consider becoming an expert in an area of interest to help you land a complimentary job or meet people with similar interests.
Increase awareness about yourself. You may be the best in the world at what you do, but if companies don’t know you exist, you’ll never get better opportunities! Joining an online forum related to your industry and finding opportunities to volunteer and help other people is one way to increase awareness about yourself to prospective employers.
Aim for a personal best in your favorite activity. Get in shape (and stay in shape!) by picking your favorite activity and aiming to achieve a personal best. If you’re a runner or a walker, for example, pick a time that would be a personal best for completing a set distance, then work toward achieving that goal. Taking care of your physical and mental health will help you accomplish more in every other area of your life.
Improve your interpersonal communication. Think about the most important relationships in your life – whether it’s with your parents, spouse, children, best friends, or someone else – and find three ways you can improve your communication skills with those people. With the time, money, and education that many spend to improve their professional skills, consider a small investment to improve your interpersonal skills.
Social media is an easy way for scammers and others to try encouraging people to pursue some really bad ideas, and that includes ways to magically increase your tax refund.
– IRS Commissioner Danny Werfel
Tax scammers continue to become more sophisticated, which means it’s more important than ever to pay attention to any person or message asking you to provide confidential information. Here are several of the more prevalent scams to be on the lookout for, according to the IRS.
Phishing and smishing. Taxpayers continue to be bombarded with email and text scams from fraudsters attempting to lure you into providing valuable personal and financial information that can lead to identify theft. Phishing involves fraudsters sending emails claiming to come from the IRS, while smishing uses text messaging and alarming language such as Your account has now been put on hold!
What you can do: Never respond to phishing and smishing messages, and never click on a link! Report all unsolicited emails, including the full email headers, claiming to be from the IRS to [email protected].
Online help to create an IRS account. A scammer may offer to help you set up an online account on www.irs.gov. While the IRS’s online account tool can provide convenient access to your tax information, it’s also a valuable source of information for identity thieves who use information from your account to submit fraudulent tax returns using your name in order to get a big refund.
What you can do: Schedule an appointment with someone you trust if you need help creating an online IRS account.
Fake charities asking for donations. Scammers masquerading as charitable organizations try to lure you into making a contribution after natural disasters and other publicized tragedies. Scammers also use fake charities to swipe personal and financial information from you, in addition to targeting certain groups such as senior citizens.
What you can do: Visit www.irs.gov, then search for Tax-Exempt Organization Search Tool. Use this tool to confirm that a charity to whom you want to donate is a legitimate organization registered with the IRS.
Fake tax advice and AI tools. Social media routinely circulates inaccurate and misleading tax information. These articles and videos share wildly inaccurate tax advice, including some that involve urging people to misuse common tax documents such as Form W-2 or Form1099. They will make is especially convincing by using AI as a buzz word.
What you can do: Don’t turn to the internet for tax advice. Remember, AI-generated ideas can also pull in inaccurate information as well!
It’s easy to fall victim to tax scams. So stay vigilant and if you see a scam, let everyone know. It’s with increased awareness that we can decrease the number of scam victims.
