What are tax credits?

A tax credit is, essentially, what it sounds like. It is a credit against your taxes.

For example, if a taxpayer has $200,000 of taxable income and is subject to tax at a 25% tax rate, they would have a tax liability of $50,000 before any tax incentives. If that taxpayer has a tax credit of $5,000 they can use the tax credit to reduce their tax liability by $5,000. In this case, their tax liability would be reduced to $45,000.

There are many different types of tax credits and a multitude of ways to obtain them. In general, governments offer tax credits to incentivize certain behavior. Some may be offered by the federal government and others by state governments. Examples of behavior that the U.S. federal government provides include the investment in clean energy technologies, the rehabilitation of historic buildings or providing low income housing. 

Why are tax credits more valuable than tax deductions? 

Tax credits are generally much more valuable than a tax deduction. In the example above, let’s assume the taxpayer had a tax deduction of $5,000. That would reduce their taxable income to $195,000. The 25% tax would apply to $195,000 yielding a tax liability of $48,750.

So, the $5,000 tax deduction reduced the tax bill by $1,250. The $5,000 tax credit reduced the tax bill by $5,000. In this case, the tax credit is four times more valuable than a tax deduction of the same amount.

What if you have no tax liability? 

Some tax credits are refundable tax credits. A refundable tax credit is a credit that allows a taxpayer to receive a check from the government if they have credits in excess of their tax liability. 

For example, if a taxpayer has a tax liability of $50,000 before taking their tax credit. If that taxpayer has a tax credit of $55,000 they may be able to use $50,000 of the tax credit to reduce their tax liability by $50,000 to zero. If it is a refundable credit, they can receive $5,000 in cash from the government for the credit that was not used to offset their tax liability.

However, many tax credits are not refundable. Previously, they were generally not transferable either. So that meant if you had a tax credit, but had no tax liability, the credit was basically worthless to you.

Are tax credits transferable now?

The Inflation Reduction Act of 2022 has made a number of tax credits transferable. In general, these are tax credits that are generated while producing or investing in clean energy. For example, tax credits are generated for building EV charging stations built in rural or low income areas. Tax credits are also available for businesses investing in clean energy technologies based on the amount of energy produced.

How can these tax credits be transferred?

Atheva provides a place where buyers can purchase these credits from sellers. We make it easy for buyers and sellers to find each other and conduct transactions. A buyer might want to buy a tax credit if they’re able to pay less than 100 cents on the dollar for the credit. This way, they’d be able to save some money in paying their taxes. Atheva takes care of all the buyer and seller authentication, as well as the contracting process between both sides. And we do all of this using industry leading security to make sure everyone’s banking and personal data is kept safe.





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