How Some Small Business Owners Get Back More Taxes Than They Paid

Image Source: Getty Images

Even if you didn’t pay the tax, you can still get a refund.

Key Point

• You can get your tax refund by maximizing your deductibles and deductibles.
• Refundable credits can result in a negative tax liability.
• Some of the most common tax credits are at least partially refundable.

Usually, you get a tax refund because you paid more tax than you were due that year. Most people do not make a profit when they pay their taxes. However, it is perfectly possible to receive a tax refund in excess of the amount paid. This can happen if at least he qualifies for one refundable tax credit.

tax credit, tax credit, refund tax credit

The legal way to minimize your tax liability is to claim all the tax credits and credits you qualify for.

Let’s look at these examples using an individual taxpayer who earned $100,000 as an example.

How do tax credits work?

A tax credit lowers your taxable income. A deduction can save you a small percentage of your deductible amount. Instead of paying tax on the higher amount, you are obligated to pay tax on the lower amount.

Within the 20% tax rate, if you have a $1,000 deduction, you save $200 (20% of $1,000).

How do tax credits work?

Tax credits reduce taxIf you qualify for a $1,000 tax credit, you can save $1,000 in taxes.

How do refundable tax credits work?

Refundable credits can be refunded even if there is no tax liability. If your taxes are $0 and you are eligible for a refundable tax credit of $1,000, you will receive a $1,000 check from the IRS.

How can I zero my tax liability and get a refund?

Let’s look at a simple example. Suppose you are self-employed and have listed your deductibles. Your total deductible exceeds the standard deductible ($12,950 in 2022).

Tax liability for $50,000 with or without deduction:

We currently deduct marketing expenses, business-related motor vehicle expenses, depreciation, business rentals, subcontractor expenses, business interest payments, recruitment supplies, legal fees, travel, and other reasonable expenses that can be documented. increase.

After-deduction of $30,000, pre-deduction tax liability:

You have enrolled in the Certification Program at half time (2 classes only) and have qualified for American Opportunity Tax Credit (AOTC). Spent $1,500 on qualifying education. The amount of the credit is 100% of the first $2,000 of the eligible expense, so you receive a $1,500 credit.

I donated $500 to the IRA, so I’m eligible for Savers Credit. This is a tax credit that rewards you for saving money in a qualifying retirement account. In this case, the credit is 50% of the donation, or $250.

You are eligible for the earned income tax credit (EITC). If he is a single taxpayer with no children in 2022, the deduction is $560.

Deductions and tax obligations after deductions:

Your tax liability is now below zero and is -$115.50. However, please note that this is not the refund amount. Savers credits are non-refundable, AOTC are only partially refundable, and EITC are fully refundable. We recommend that you use tax software or consult a tax advisor to find out exactly how much the IRS owes you.

Are W-2 employees eligible for refundable tax credits?

Payroll employees are fully eligible for tax deductions. However, this scenario might work better for the self-employed. Many business-related tax credits are not available to those who work as employees of a company, making it harder to lower their taxable income. For example, most self-employed people can deduct health insurance premiums, but an employee cannot deduct unless the total medical expenses for the year exceed her 7.5% of her income.

How many tax credits are there?

Tax laws change from time to time, but you may be eligible for several other common deductions in addition to the tax credits above. This includes childcare tax credits, lifelong learning credits, adoption credits, and more. Get more information from tax experts. If not, pay special attention to the questions asked while using tax preparation software.