Happy Valentine’s Day. Can you believe February is already half over? If you’re scrambling for a last-minute gift idea, sharing Reasoned Reflections with your special someone might just be the hottest gift on the market this year! Okay… probably not.

Here’s a tip I learned the hard way: don’t wait until tomorrow when the price of roses drops. Just spend the money today. Trust me, the cost savings aren’t worth ruining date night!

Last week, we talked about above-the-line deductions and how they can lower your taxable income. But this week, we’re diving into something even better: tax credits.

TODAY ON REASONED REFLECTIONS:

• Personal finance articles 💰;

• Popular tax credits;

• Time to reflect;

• Quote of the Reflection.

Personal Finance Articles 💰

Time for a bit of R&R

• The right financial mindset

  My Take - I’ll be the first to say—you can accomplish anything you set your mind to, and getting your finances in order is no different. Now might be the perfect time to reset your financial mindset, take control of your money, and start making intentional moves toward your goals.

• Dave knows best?

  My Take - Stop going into debt just to look cool. Preach, Dave! Trying to keep up with the Joneses is a fast track to financial stress. At the end of the day, the Joneses probably aren’t as well off as they seem—and your future self will thank you for prioritizing financial security over appearances!

• I’m worth more dead than alive

  My Take - No one likes to think about death, but securing life insurance is one of the smartest ways to protect your loved ones financially. Locking in a policy while you’re young keeps premiums lower, and in most cases, a term policy makes way more sense than whole life—cheaper, simpler, and designed to cover the years when your family needs it most.

• Tax changes to keep an eye on

  My Take - Several key tax changes from the 2017 Tax Cuts and Jobs Act (TCJA) came with built-in sunset provisions, and they’re set to expire at the end of this year. That means some major shifts could be on the horizon for tax rates, deductions, and credits. Now’s the time to keep an eye on whether Congress takes action to extend these provisions or if we’ll see a return to pre-TCJA tax rules.

• Tax free investing

  My Take - I probably sound like a broken record at this point, but I really like the idea of tax free withdrawals in retirement, thanks to Roth retirement accounts. Sure, I could take the immediate tax break now with a traditional retirement account, but who knows what my effective tax rate will be in retirement? Roth contributions eliminate that guesswork, giving retirees more flexibility and control over their income down the road.

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Looking ahead!

Last week, we covered above-the-line deductions, so naturally, it’s time to dive into below-the-line deductions (aka itemized deductions).

Next week, we’ll break down the key differences between taking the standard deduction and itemizing, helping you determine which approach could save you the most on your taxes. Stay tuned!

Reflection No. 22: Tax Credits

I - Issue: What’s a tax credit? 

R - Rule: A tax credit reduces your tax liability dollar for dollar and some can be refundable. 

A - Analysis: A tax credit is an amount you subtract from the tax you owe, which directly reduces the taxes you may have to pay or could increase the amount refunded to you. 

There are a variety of tax credits available, so when filing your return, it’s worth checking which ones you qualify for. Below are some of the most common and valuable tax credits: 

Child Tax Credit

The Tax Code sure seems to incentivize starting a family. Enter the Child Tax Credit. To qualify, the child must:

• Be under 17 years old

• Be a U.S. citizen

• Have a Social Security number

• Be claimed as a dependent on your tax return

For 2024, the CTC is worth up to $2,000 per qualifying child, with income limits of $200,000 (single) or $400,000 (married filing jointly) before the credit begins to phase out.

Education Tax Credits

Higher education prices are ridiculous. In-state tuition at public universities has skyrocketed 133% in the last two decades (not adjusted for inflation). To help combat these crazy prices, the Tax Code offers some education credits. Thanks, Uncle Sam!

You may qualify for either the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit (LLC) if you paid for tuition and related expenses for yourself, your spouse, or a dependent.

AOTC

This credit is available for the first four years of higher ed. The maximum credit per year is $2,500 for each eligible student, and the taxpayer can get up to $1,000 of the credit refunded if the credit brought the taxpayer’s tax liability to $0. 

LLC

The Lifetime Learning Credit comes into play after you’ve used the AOTC four times. There is no limit on the number of years a taxpayer can use this credit, and it can be used for undergrad, graduate, and professional degrees. The maximum credit is $2,000. Additionally, it can used if you paid for courses to acquire or improve job skills. In contrast to the AOTC, the LLC is a nonrefundable credit. 

The Saver’s Credit

The Saver’s Credit rewards taxpayers who contribute to an IRA or employer-sponsored retirement plan—as long as their income is below certain levels.

• The credit equals 10%, 20%, or 50% of your retirement contributions, depending on income.

• The maximum eligible contribution is $2,000, meaning the highest credit you can receive is $1,000.

This credit is especially useful for lower-income earners trying to build their retirement savings while reducing their tax bill.

EITC

The Earned Income Tax Credit offers assistance for low to moderate income families. This credit is for certain people who work and have earned income under ~$67,000.

One of the main requirements for this credit—as the name suggests—is that you must have earned income. If you are married filing jointly then this requirement can be satisfied if at least one spouse works. In addition to this rule, the taxpayer must have an adjusted gross income under certain limits depending on marital and familial status, a valid SSN, and any investment income that is below certain levels, among other things. 

An added benefit of the EITC is that it’s a refundable credit. So, even if you don’t owe any taxes, you can still get a refund from the EITC. 

C - Conclusion: There are many tax credits out there, so it pays to see which ones you might be eligible for. Most tax filing software companies or a good accountant will flag the ones that apply to your situation.

Time to Reflect…

Tax credits really are the gold standard when it comes to lowering your tax bill since they reduce your tax liability dollar for dollar. It’s like getting extra credit on a test—except this time, it’s money back in your pocket!

We only covered a few tax credits in today’s Reflection, but check out this IRS resource if you’re looking for an all encompassing list. 

Quote of the Reflection