Social Security

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What Is Tax Credit?

A tax credit reduces the taxes you owe, dollar for dollar. In other words, if you have a tax credit of $500, that credit lowers your tax liability by $500. If tax credits result in a negative tax liability, you may receive a refund.

Tax credits are different from tax deductions. Deductions lower your taxable income in the same amount as your marginal tax bracket. For example, if your tax bracket is 25 percent, a $1,000 deduction lowers your taxable income by $250.

Tax Credit Rules

In order to claim tax credits, you must meet certain eligibility requirements. For example, if you claim the Child Tax Credit, each qualifying child must meet six tests: age, relationship, citizenship, support, dependence, and residence. The child must be:

  • under the age of 17,
  • legally related to you through blood, fostering, or adoption,
  • a citizen of the United States,
  • provide less than half of their own support,
  • count as a dependent on your federal tax return, and
  • live with you more than half of the year.

Social Security Tax Credit

Your employer deducts Social Security Tax from your paycheck each pay period. The tax is calculated at the flat rate of 4.2 percent of your first $110,000 earned, a maximum amount of $4,624.20 per year.

Overpayment of Social Security tax doesn’t happen often, but is possible. Employees who work more than one job may be more likely to overpay, since both employers deduct tax at the same rate. If your combined salary is over $110,000, you might be eligible for a refund of the overpaid amount.

Use your W-2 forms to calculate the total amount you’ve paid into social security for the year, then calculate 4.2 percent of your income. Subtract the amount paid from the amount owed. If the result is positive, claim your Social Security tax credit by entering it on line 69 of form 1040. For form 1040A, record your credit on line 44 and note “Excess SST” in the space provided.

Earned Income Tax Credit

The Earned Income Tax Credit (EITC) provides tax relief for people who are employed, but still fall below the federal poverty level. In many cases, eligible taxpayers receive a tax refund.

The maximum claimable amount under this working tax credit varies with income and the number of children in each family. Childless individuals or couples may claim up to $506, while single-child families may receive up to $3,373 in credit. Two-child families are eligible for a maximum credit of $5,572, and families with three or more children may claim up to $6,269 in EITC.

Tax credit law also places limits on how much each family may earn:

  • $14,880 for individuals or $20,430 for married couples who are childless;
  • $39,296 for individuals or $44,648 for married couples with one child;
  • $5,572 for individuals or $50,198 for married couples with two children; or
  • $6,269 for individuals or $53,505 for married couples with three or more children.

Working Family Tax Credit

The state of Minnesota offers a state tax credit similar to the federal EITC. Claimants must be residents of the state. It is also based around income and the number of qualifying children in the family.

Other tax credits include energy efficiency credits, educational credits, retirement credits, and child and dependent care credits. Each credit has its own guidelines. For tax credit help, ask an Expert any time, day or night.

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