Introduction to Individual Taxation Deductions and Credits IV
Building on previous discussions on several deduction mechanisms in the U.S. individual income tax system and clarifying the differences between deduction mechanisms and nonrefundable tax credits, this article will continue to introduce refundable tax credits, which are more universally beneficial. Such credits can not only reduce the tax liability to zero but also refund the excess amount to taxpayers in cash. This characteristic makes them a key tax burden adjustment tool for low- and middle-income households.
This article will briefly introduce the Child Tax Credit, the Earned Income Tax Credit, and the Small Employer Pension Plan Startup Cost Credit. By clarifying the eligibility criteria, calculation rules, and tax refund procedures, it aims to help taxpayers maximize policy benefits and achieve the dual goals of legitimate tax burden optimization and cash flow improvement.
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Child Tax Credit
Taxpayers can claim a $2,000 tax credit for each "eligible child," provided the child is younger than 17. Eligible children must possess a valid Social Security number; children without a Social Security number may be claimed as an "other dependent" to receive a limited credit.
A $500 nonrefundable tax credit is permissible for each taxpayer-dependent who satisfies the dependency provisions of Section 152 but either has reached age 17 or is under 17 without a valid Social Security number. This credit applies to tax years spanning 2018 through 2025.
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Earned Income Tax Credit (EITC)
Earned income encompasses wages, salaries, gratuities, other forms of employee remuneration, and self-employment earnings. This definition excludes pension or annuity payments.
An individual cannot claim the credit if the individual has "disqualified income" exceeding. An individual is ineligible to claim the credit if their "disqualified income" exceeds $11,600 in 2024 ($11,950 in 2025). Disqualified income comprises taxable and tax-exempt interest, dividends, net rental and royalty earnings, net capital gains, and net passive income—excluding self-employment earnings.
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Small Employer Pension Plan Start-up Costs Credit
For tax years beginning after December 31, 2019, eligible employers can claim a tax credit for the first credit year and each of the two tax years immediately following. The credit equals 50% of qualified start-up costs (100% for businesses with fewer than 50 employees), up to the greater of (a) $500; or (b) the lesser of (i) $250 multiplied by the number of non-highly compensated employees eligible to participate in the employer's plan, or (ii) $5,000.
Reference:
https://www.irs.gov/pub/irspdf/f1040s1.pdf
https://www.irs.gov/pub/irs-pdf/p529.pdf
https://www.irs.gov/pub/irs-pdf/p590a.pdf
https://www.irs.gov/pub/irs-drop/n-23-75.pdf
https://www.irs.gov/pub/irs-pdf/i3903.pdf
https://www.irs.gov/pub/irs-pdf/p550.pdf
KNOWLEDGE
