When it comes to saving on taxes, there is nothing better than a tax credit. A tax credit is a dollar-for-dollar reduction in your taxes. Thus, a $1,000 tax credit reduces your taxes by $1,000.
There are many different types of tax credits in the tax code. Each tax credit is different, with its own eligibility rules and amounts.
Here are four valuable tax credits that millions of self-employed people can use.
Obamacare health insurance tax credit
When you’re self-employed, you usually have to purchase your health insurance on your own. The only exception is if you can obtain coverage through your spouse’s employer.
Bottom line, health insurance is expensive. Fortunately, you may qualify for a tax credit to help pay for it. The Affordable Care Act (popularly known as Obamacare), provides a premium assistance credit for those who purchase health insurance from a state health insurance exchange.
You are eligible for the premium credit if:
- Your household income is between 100% and 400% of the federal poverty level (FPL).
- You are not eligible for other affordable coverage.
- You obtain your health insurance coverage through a state health insurance exchange (see www.healthcare.gov/get-coverage).
- You file a joint tax return if you’re married.
Based on the 2019 FPL, the credit is available for individuals with household incomes below $48,560 and families of four with incomes below $100,400. The IRS has an interactive online questionnaire you can use to see if you qualify for the premium tax credit.
The credit is usually paid directly to health insurers by the federal government.
The amount of the credit depends on your income and the cost of your health insurance coverage. The most that families buying coverage in an insurance exchange have to pay towards a health insurance premium ranges from 3.0% of income at 133% of poverty to 9.5% of income at 400% of poverty.
This credit can be substantial. For example, a 50-year-old single person earning $48,000 per year in San Francisco could qualify for an annual credit of over $ 4,000. You can obtain an estimate of the credit you could qualify for at the Kaiser Health Reform Subsidy Calculator.
For more information on all aspects of Obamacare, see www.healthcare.gov.
Lifetime learning credit
You can use the lifetime learning credit to help pay for undergraduate or graduate-level education, including nondegree education, or acquire or improve your job skills. (for example a continuing education course).
If you qualify, your credit equals 20% of the first $10,000 of postsecondary tuition and fees you pay during the year. Deductible education expenses include tuition, fees, books, and other learning materials. They also include transportation and travel.
The maximum credit is $2,000 per tax return. However, the credit phases out and then eliminated at certain income levels. It begins to go down if your modified adjusted gross income is more than $58,000 ($116,000 for a joint return).
You cannot claim the credit at all if your MAGI is more than $68,000 ($136,000 for a joint return). These are the limits for 2019. The IRS adjusts these limits for inflation each year.
You can take this credit not only for yourself, but for a dependent child (or children) for whom you claim a tax exemption, or your spouse as well (if you file jointly). And you can take it any number of times.
Saver’s Credit
Self-employed people ordinarily have to fund their retirement plans. The tax law encourages you to do this. Amounts you contribute to IRAs, 401(k)s, and other tax-qualified plans are tax deductible, within limits.
In addition, you can get a tax credit for contributions to your retirement plan if your income isn’t too high. This dollar-for-dollar reduction of your gross tax liability is the Saver’s Credit.
The credit is equal to 50%, 20% or 10% of your retirement contributions depending on your adjusted gross income. However, the maximum annual credit amount is $2,000 ($4,000 for married couples).
The Saver’s Credit is for people with modest incomes. It phases out as your income goes up. It’s completely phased out for single filers with an adjusted gross income over $32,000 ($64,000 for couples filing jointly).
Tax credits for buying a green vehicle
Green vehicles—those propelled at least partly by means other than an internal combustion engine—tend to be more expensive than old-fashioned gas-powered cars. Thus, a federal tax credit is available to encourage people to buy them.
This specific credit can significantly reduce the cost of buying an alt-fuel car. For example, if you purchase an all-electric vehicle that qualifies for a $7,500 tax credit, you’ll save $7,500 on your taxes (provided that you owe at least that much in tax).
Tax credits are available for:
- Hybrid cars: Plug-in electric drive vehicles powered by both an internal combustion engine and a rechargeable battery
- All-electric vehicles (EVs) that run on battery-provided electricity only
Such vehicles are eligible for a tax credit ranging from $2,500 to $7,500, depending on the capacity of the battery. For example, if you purchase a 2020 BMW 5 Series plug-in hybrid, you can get up to a $5,836 tax credit.
To obtain the credit, the vehicle you buy must be on the IRS’s certified list of vehicles that qualify for the credit. You can find an updated list at https://www.fueleconomy.gov/feg/taxevb.shtml. This list also shows the amount of tax credits for each vehicle.
To complicate matters, these credits phase out once 200,000 of each model get built by the manufacturer. The IRS announces when a manufacturer exceeds this production figure and will announce the subsequent phase-out schedule.
Be sure to check these reports before you buy a plug-in electric vehicle. Otherwise, you could be disappointed to discover you’ll get no tax credit. You can check at www.fueleconomy.gov
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