Have you ever thought that you’re paying too much income tax? You may be if you’re not claiming all of the tax credits for which you are eligible when you file your federal tax return. These credits may significantly reduce your tax liability.
What is a tax credit? A tax credit is a dollar-for-dollar reduction of your tax liability.
What is the difference between a tax deduction and a tax credit? A tax deduction reduces your taxable income so that when you calculate your tax liability, you’re doing so against a lower amount. Essentially, your tax obligation is reduced by the same percentage as your tax rate. On the other hand, a tax credit is a constant. A tax credit of $100 will reduce your tax liability by $100, regardless of your tax bracket. But a tax deduction of $100 saves you only $25 if you are in the 25% tax bracket.
Explain the child and dependent care credit. If you’re working or looking for work, and you need to pay someone to look after your child or other qualifying individuals, you may be eligible for the child and dependent care credit. A dollar limit applies to the amount of work-related expenses you can use to figure the credit. This limit is $3,000 for one qualifying person or $6,000 for two or more qualifying persons.
What is the child tax credit? If you’re eligible, you may be entitled to take a credit of up to $1,000 per child. A qualifying child is typically a child, grandchild, stepchild, or foster child under the age of 17 who lives with you for more than half the year and provides less than half of his or her own support.
What is the earned income credit? The earned income credit benefits working taxpayers who have low income. You can apply for it only if you work, either as an employee or in your own business, and you have earned income during the tax year. The amount of the credit is based on your adjusted gross income, your filing status, and the number of qualifying children you have.
What are education credits? The American Opportunity Tax Credit credit is worth a maximum of $2,500 per year and is available to each student in the household for four post-secondary education years (provided the student is attending at least half-time). The Lifetime Learning credit is worth a maximum of $2,000 per year and is more widely available. Students who are attending college or graduate school (even less than half time), taking continuing education courses, or pursuing courses connected to hobbies and other interests may be eligible for this credit. However, the Lifetime Learning credit is limited to $2,000 per tax return per year, regardless of how many students in the family may qualify.
Are there any other tax credits? You may also be eligible for other federal tax credits, including the credits below:
- Adoption tax credit
- Tax credit for the elderly or the disabled
- Foreign tax credit
- Tax credit for contributions to retirement plans
- Tax credit for qualified alternative fuel (or clean-fuel) vehicles
- Tax credit(s) for making energy-efficient improvements to a primary residence, or for purchasing qualified energy-efficient property.