Taxes are the primary source of government revenue. They are used to stabilize the country’s economy and promote social balance within the society. Most tax types imposed are from the flow of its revenues. The government also has expenditures, so taxes are set to balance income and expenses. A balanced budget is in place when the costs and revenue are equal. Over time, the government influences the economy’s direction by changing government spending and taxes to bring better outcomes for its residents. Know more about AZ tax credit here.

What Are the Common Tax Types in the US?

The US government imposes different tax types to collect revenue and support its expenditures and operations. The typical tax types that most citizens know are:

1. Excise Tax: These are new taxes paid by businesses for the sale of goods. Specific goods, such as tobacco, alcohol, or fuel, have higher taxes than the rest.
2. Sales Taxes: This tax is imposed at the point of sales of goods or services rendered. It is also called a consumption tax.
3. Corporate Income Tax: A tax imposed on the company’s profits.
4. Income Tax: It is the tax imposed on an individual’s salary or wages.
5. Capital Gains Tax: It is a tax on the increased value of properties.

Most likely, you are using one or more of these types when you file them for tax purposes. But have you ever wondered about using tax credit or tax deduction to decrease the amount you pay?

AZ Tax Credit and Tax Deduction: Are They Different?

Filing your income tax can be confusing when specific changes within the IRS law. Starting 2018, tax exemptions no longer exist, but tax credit and tax deductions are still accessible to taxpayers.

Let us differentiate between a tax deduction and a tax credit.

Tax deduction generally arises from your expenses, computed in itemized or standard form. If your itemized deduction can be higher than the standard deduction of $12,550 for filing as a single taxpayer or $25,100 for filing as married, it can make your taxable income lower. The tax deduction is then deducted from your gross income to get the taxable income amount.

Tax credits are deducted from your indirect tax computation, unlike a tax deduction. It is called dollar-for-dollar value. Tax credits have more impact on your tax. There are three types of tax credits: refundable, non-refundable, and partially refundable. Of these three types, the refundable type is the most beneficial to taxpayers, where individuals and couples use EITC (earned income tax credit) the most. However, specific criteria should be met, such as the number of family members and the taxpayer’s income having a low to moderate-income through an employer or being a self-employed individual.

What are the popular top tax deductions and tax credits for individual filers that you should know about?

1. Child tax credits (CTC): It is an annual AZ tax credit that can be availed to qualified dependent children. The tax credit is $2000 per child but was expanded to $3600 per child in 2021. Some guidelines should be followed between filing jointly or individually.
2. Child and dependent care tax credit: This tax credit covers a percentage of daycare spent for a child of fewer than 13 years, a spouse or a parent, or another dependent who cannot care for themselves, enabling the taxpayer to work.
3. American opportunity tax credit: This credit lets you claim the first $2000 spent on books, tuition, equipment, and related school fees and 25% of the next $2000 you spent on the said items. Transportation and living expenses are not included in this tax credit.
4. Lifetime Learning tax credit: You can claim 20% of the first $10,000 spent on tuition and books for a maximum of $2000. Like American Opportunity credit, transportation, and living expenses don’t count on this lifetime learning credit.
5. Tax-deductible donations: These are contributions of money or goods to tax-exempt organizations. To claim deductible contributions, you must itemize your tax return by filing schedule A of IRS form 1040 or 1040-SR. For the current tax year (2021), you can deduct up to $300 per person of cash donations without having to itemize.

The tax-deductible donation will only qualify when donating to a qualifying organization defined by section 501 (c)(3) of the IRS Code. You can verify the organization’s status with the IRS exempt organizations select check tool. Before you donate, ask the charitable organization how much your contribution will impact the tax deduction.

 

The ERTC

Another new tax credit type that you should know about is the ERTC or employee retention tax credit. It is applicable for employees of businesses that were ordered to partially or fully shut down in 2020 and 2021. ERTC is a part of the CARES Act that has paid millions to shut down businesses. The CARES Act is The CoronaVirus Aid, Relief and Economic Security Act (2020) and the Coronavirus Response and Consolidations Appropriations Act (2021), providing fast and direct economic assistance for American workers, families, small businesses, and industries.

These are tax refunds given one time, and no need to repay as these are not loans. A particular company is eligible for the ERTC tax refund when it is ordered to partially or fully shut down during 2020 or 2021, or the business suffers a significant decrease in sales in 2020 or 2021. The IRS will send a check when the company has paid its employees. An employee can receive up to a $5000 refund for 2020, and an employee can receive up to a $21,000 rebate for 2021. So employees may receive up to a $26,000 refund in total.

Arizona’s New Tax Opportunity

Arizona recently introduced a new tax credit opportunity where you can donate your tax credits to a qualified charitable organization (QCO). The proceeds will go to a school, family, or institution used to support your noble causes like child care, financial aid to military families, or tuition aid.

Takeaway Thoughts

Tax is necessary to keep our government running, supporting economic and societal growth. As individuals or couples have varying income sources, you may choose the appropriate tax type applicable to you when filing your taxes. In addition, while tax exemptions are not existent in most states today, you can still file for tax credits or tax deductions.

While tax deductions can lower the dollars you pay, you may want to consider looking into using your AZ tax credit. If you are in Arizona, you can also use your AZ tax credit to donate to low-income families, schools, or organizations to help support them.

Children’s Care Arizona (CCA) is one of Arizona’s qualified charitable organizations to process your AZ tax credit. You will receive a CCA receipt which you can use when filing taxes. If you want to know more about this amazing tax credit opportunity and help families in return, call us at (480) 795-3775 or email at support@childrenscareaz.org.