Child care tax credit almost doubles…but don’t spend it yet! The child care tax credit could increase, thanks to Obama, but don’t go spending that hefty taxÂ credit just yet.Â While many Americans enjoy the current credit, and can even receive it back as part of their refund – the new increase won’t be a refundable credit.
What does that mean? It means you won’t be able to spend it – the credit will only reduce the liability you owe to the government.Â If you’ve been good and practiced good tax planning, you won’t see this as an additional bonus.
However, I’d take a tax credit over a tax deduction any day.Â Why? Deductions simply reduce the amount of income you pay taxes on. Credits reduce the ultimate amount of tax you pay.
Still don’t understand? It helps to put things with numbers.Â Say you pay 10% taxes on $1,000 of income.Â Without any credits or deductions, your tax bill will be $100.
With a $100 tax deduction, you will pay 10% on $900 – or $90. You just saved $10.
With a $100 tax credit, you will still pay 10% tax on $1,000 but you will subtract $100 from your final bill.Â Your tax liability? Zilch.Â You pay nothing.
Obama has a few proposals:
1) Increase child care tax credit from 20% to 35% for families earning under $85,000
2) Propose limiting federal student loan payments to 10 percent of a student’s income above a basic living allowance.
3) Propose $1.6 billion in increased funding for child care for low-income families
4) Create a system where all employers must offer direct deposits to IRAs for workers
5) Expand “savers tax credit.”
So while you may be excited about the increased child care tax credit – don’t count your chickens before they hatch.
And don’t spend your tax refund before it’s in your hands, either.