Taxes can be complicated and while we all wish we were able to do our taxes on our own, sometimes this just isn’t feasible. It is especially important to ensure that your taxes are done by a certified professional when you file a more complicated type of return. The more complicated your taxes are, the less margin you have for error given the substantial financial and legal consequences for filing incorrectly. One such tax question that many have revolves around usage of the Fuel Tax Credit. So, what is this tax credit and what questions do you need answered to better understand it?
- How Does One Claim A Fuel Credit?
- What Is The Value Of This Tax Credit?
- What Is The Difference Between A Tax Credit And A Tax Deduction?
How Does One Claim A Fuel Credit?
A Fuel Tax Credit can be used in a variety of ways depending on a variety of factors including, but not limited to, what type of fuel is being utilized and what capacity the fuel is being used in. For example, one specific profession that can claim the fuel credit is the commercial fishing industry. Large fleets of boats and incentivize by offering a portion of the taxes paid on the nautical fuel back as a tax credit. Additionally, some manufacturing industries can claim the tax credit for the fuel required to run various machinery. Once you have consulted with a certified tax professional to ensure that your fuel usage qualifies for this credit, you can fill out a Form 4136. This allows the credit to applied to your return and adjusted accordingly.
What Is The Value Of This Tax Credit?
The value of this tax credit depends entirely on the type of fuel you are using and the way you are using it. Every different fuel has an associated value and tax rate which means the tax credit value is not the same. Although a flat value cannot be assigned to the tax, it can be calculated once you know the credit value per gallon. Simply multiply your fuel usage in gallons by the tax credit value for this fuel which equals your dollar for dollar tax credit.
What Is The Difference Between A Tax Credit And A Tax Deduction?
Tax credits and tax deductions are often confused with one another. So what is the difference? The biggest difference is the rate at which your taxes are reduced. A tax credit is a dollar for dollar reduction of the total taxes you must pay. A tax deduction only reduces the total amount of money that can be taxed. For example, if your income was $60,000 your federal tax rate is 22% meaning you would pay $13,200 in taxes annually. If you were to receive a tax credit for $3,000, this means you would only have to pay $10,200 that year in taxes. If you have a tax deduction of $3,000 you would now be taxed the same 22% on $57,000 of income. This means paying a total tax bill of $12,540. Clearly, tax credits allow you to keep more of your income than a tax deduction.
While it is important to be informed, to truly make sure you are properly utilizing the Fuel Tax Credit, it is imperative to consult tax professionals for all tax related questions.