Bank Deal: Earn 1.00% APY on an FDIC-insured savings account at Barclays.
Unlike income tax deductions, which reduce your taxes by reducing your taxable income, tax credits offer a straight up, dollar-for-dollar reduction of your tax bill. In other words, a $500 tax credit will reduce your tax bill by $500. In contrast, a $500 tax deduction will reduce your tax bill by anywhere from $50-$175 (depending on your income tax rate). Better still, many tax credit are “refundable,” which means that you can take advantage of them even if you don’t owe any taxes.
What follows is a rundown of common income tax credits. While this list is by no means exhaustive, it’s a good starting point as you begin pulling your taxes together.
Earned Income Tax Credit
The Earned Income Credit (EIC) is a refundable for low-income individuals/families. The amount of this credit depends on income level and family size. Details can be found in IRS Publication 596.
Saver’s Tax Credit
The Retirement Savings Contribution Credit provides a credit for a portion of an individual’s qualified retirement contributions. You have to be at least 18 years old and not a full time student to qualify. There are also AGI limits that might affect your eligibility for this credit. See Chapter 5 of IRS Publication 590 for details.
Child Tax Credit
The Child Tax Credit is a credit given provided to taxpayers for each dependent child who is under the age of 17 at the end of the tax year in question. A maximum of $1000 can be claimed per child, though the credit is limited based on your AGI. There is also an additional child tax credit that is available for those that are eligible for the tax credit, but have three or more qualifying children. Details can be found in IRS Publication 972.
Adoption Tax Credit
The Adoption Tax Credit applies to qualifying expenses associated with adopting a child. Note that the credit might be higher if you adopt a child with special needs. You should also be sure to check with your employer, as many benefits packages offer reimbursement of a portion of the costs associated with adoption. For details on this credit, see IRS Topic 607.
Child and Dependent Care Tax Credit
The Child and Dependent Care Tax Credit is intended to offset expenses associated with the care of children under the age of 13, or for a disabled spouse our dependent, such that the taxpayer can work. See IRS Publication 503 for details.
Education Tax Credits
The Hope Credit and Lifetime Learning Credit are intended to defray expenses related to education. The Hope Credit applies to the first two years of post-secondary education, whereas the Lifetime Learning Credit is available for all post-secondary education for an unlimited number of years. See IRS Publication 970 for details.
Social Security Tax Credit
As you may or may not know, Social Security taxes are capped such that, if you earn enough money, you don’t have to pay Social Security taxes on the overage. For 2008, the limit was $102,000. While your employer should respect this limit when figuring your withholding, it’s likely that you had too much money withheld if you had multiple employers for a total of more than $102k in earnings. This credit allows you to recover the excess withholding. See IRS Topic 608 for details.
Foreign Tax Credit
The Foreign Tax Credit is intended to reduce the double tax burden when income from a foreign source is taxed by both the originating country as well as the United States. This credit applies not only to individuals that have worked in foreign countries, but also to individuals that have received income from certain foreign investments (including many international mutual funds). See IRS Publication 514 for details.
If you previously paid the Alternative Minimum Tax (AMT), but are not liable for it this year, you might qualify for the AMT Tax Credit. This credit allows you to recover a portion of your previous AMT payments. See IRS Topic 556 for details.
First-Time Homebuyer Credit
Finally, we have the First-Time Homebuyer Credit. This one has actually been in the news a lot lately, and we’ve talked about it some here. In short, this is a $7500 tax credit (that’s the maximum amount; it’s actually 10% of the purchase price up to $7500) provided to first time homebuyers who purchase a house between April 9, 2008 and June 30, 2009. As things currently stand, this “credit” is an interest free loan that has to be repaid in 15 equal yearly installments. That being said, there has been a lot of talk about turning this into a refundable tax credit as part of the forthcoming economic stimulus package. See IRS Topic 611 for details.
Update: The Senate has pushed this up to a $15,000 homebuyer tax credit.
- How to Become a Millionaire
- How to Get Out of Debt
- The Best Dollars I've Ever Spent
- How Our Estate Plan is Structured
- How We Paid Our Mortgage In Less than 10 Years
- Money Making Ideas
- How to Manage Your Asset Allocation with Multiple Accounts
- Consumption Smoothing - Save While the Saving's Good
- How to Save on Groceries
- How Much Life Insurance Do You Need?
- Eleven Great Books About Money
- Dave Ramsey is Bad at Math (693)
- Dish Network Customer Service SUCKS (537)
- $8,000 Homebuyer Tax Credit (429)
- Pay Off Mortgage Early or Invest? (424)
- How to Claim the First-Time Homebuyer Tax Credit (352)
- Termite Control: Sentricon vs. Termidor (330)
- How Much Should You Pay a Babysitter? (291)
- Ethanol Blended Gas = Lower Mileage? (273)
- Reduced Credit Limits? Share Your Experience (256)
- $15,000 Homebuyer Tax Credit (242)
- Buying Furniture off the Back of a Truck (237)
- Will Mac OS X Lion Kill Quicken 2007? (191)