I feel so stupid for having to ask this, but there it is. I read in This Old House that as part of the stimulus bill if you get new energy efficient windows before December of 2010 there’s a 30% tax credit up to a certain amount. I NEED new windows. But is a tax credit just adding on to your deductable? Last year my deductable was ridiculous, but it was obvious that there was a point after which it didn’t help me anymore, so I don’t think anything that just lets me deduct it will necessarily help. But if it’s money that I definitely get back, or “free” money, then that would help. So what exactly is a tax credit?
You’re confusing tax credits with tax deductions.
A tax credit decreases your tax burden by its face value- if you receive a $50 tax credit, that means you pay $50 less in taxes.
A tax deduction reduces your taxable income. That means if you get a $50 tax deduction, you don’t pay taxes on a $50 extra in addition to your regular non-taxable income- therefore, you’re really only getting ($50 x [whatever your marginal tax rate is]).
A tax credit probably won’t help you if you pay no taxes at all, but otherwise, you’re getting free windows.
A tax credit is subtracted directly from the amount of tax you owe.
Let’s say, for example, you owe $500 in tax. If you have a tax credit of $400, then you will owe only $100.
So if I got my windows this year, then next April there will be something on the tax form where I can say, “Yes, I spent two thousand bucks on windows” and they’ll send me back an extra six hundred bucks in my return?
Compare that to a tax deduction. Let’s say you earn $10,000 and you are taxed at 30% (just to keep it simple). That means you would owe $3,000 in taxes.
Now, let’s say you have a tax deduction (not credit) of $400, just like before. A tax deduction is not subtracted from the amount of tax you owe, but from the amount of your income.
So, your income would be calculated at $10,000 - $400, for a total of $9,600. At a tax rate of 30%, you would owe $2,880 in taxes — a savings of only $120.
So as you can see, tax credits are generally preferable to tax deductions.
If it’s a tax credit, you’ll get an additional $2,000 in refunded taxes. If it’s a tax deduction, then you will subtract $2,000 from your income and figure the tax on the revised amount.
Sweet! I’ll do a little “windows windows windows” conga dance now.
There are caveats.
First, the tax credit is non-refundable. If you have zero tax liability, the credit does not help you (i.e., if you owe zero taxes and all your tax witholdings and payments are refunded to you, you cannot also claim this credit and try to get even more money back). Second, there are restrictions regarding the costs you may claim and the types of improvements you must purchase to qualify for the credit. See Energy Star: Federal Tax Credits for Energy Efficiency.
Note that if you don’t make much money- work part time or something- and file singly, you may not actually have $2,000 in taxes to refund over and above what you’re already getting back.
ETA: What Caldazar said.
Not if it is a 30% credit, as Zsofia said. 30% of $2,000 is $600, so that would be the value of the credit / deduction.
Well, yes, of course. That’s why I said “just to keep it simple”. But you’re right.
As always, the reality is a bit more complicated than that. Here’s the .gov page that contains current information about the program (which Caldazar already linked to). Note particularly that only specifically approved windows can be installed to recieve the credit, and there’s a limit on how much money you can receive as a credit.
I knew about the limit, will have to see how limiting the specific windows are. (I need a very specific appearance, because my house is in a historic district.)