Filing taxes each year isn’t something many people enjoy, but many people forget that there are a number of income tax credits available that may greatly reduce taxes. Unlike a deduction, which reduces how much a taxpayer owes Uncle Sam by a certain percentage, a tax credit isn’t affected by any mathematical percentages. A tax credit of $1000 reduces a tax bill by $1000 dollars.
One of the best facets about these tax credits is that you don’t even need to owe any taxes to take advantage of credits. Deductions don’t work the same way since those tax items can only reduce a current tax bill, not create a tax refund. Even if you’re not currently eligible for any tax credits, knowledge of those credits may make it possible to qualify in the future.
1 Adoption Tax Credit
Families who choose to adopt are eligible for the adoption tax credit, and may even receive a higher credit if the adopted child has special needs such as a developmental problem or a physical disability that requires extra care.
2 Alternative Minimum Tax Credit
The Alternative Minimum Tax (AMT) may kick in one year, yet a taxpayer might not be required to pay it the next year. In such cases, the AMT credit is a recovery credit that allows a taxpayer to recoup some of the funds paid for AMT in the past year.
3 Child Tax Credit
This credit applies to any family with kids under the age of 17 and the credit may reach up to $1,000 per child. Note that there is another credit available for any family that has at least three or more children.
4 Dependent & Child Tax Credit
For anyone who must help support a child under the age of 13 or provide care for a disabled relative, this tax credit may apply. For example, paying for a home nurse for a disabled spouse while the taxpayer leaves the house each day for work is an eligible type of expense.
5 Earned Income Tax Credit
Meant for low-income taxpayers, this credit is calculated based upon the size of the family and how much money is brought home each year. For example, the credit is not available for childless taxpayers if they earn more than $13,980. Alternatively, a family of 5 cannot earn more than $45,060 (or $50,270 for married filing jointly).
6 First-Time Homebuyer's Credit
For families purchasing a home for the first time, this credit may yield up to $7,500. Note, however, that this credit must be repaid over the fifteen years that follow a taxpayer’s decision to take advantage of the credit.
7 Foreign Tax Credit
For anyone who must pay taxes in another country yet is also responsible for taxes in the United States, a credit is available to reduce the burden of double taxation. This credit effects income as well as foreign investments.
8 Hope Credit and Lifetime Learning Credit
These credits are meant to help taxpayers cope with the cost of higher education. For the first two years of school, a taxpayer (or his parents) is eligible for the Hope credit. For further education, the Lifetime Learning Credit comes into play.
9 Plug-In Electric Drive Vehicle Tax Credit
The IRS will offer taxpayers a $2,500 for any electric vehicle purchased after December 31, 2009 and the tax credit may be as high as $7,500, depending on the capacity of the vehicle’s battery.
10 Saver's Tax Credit
Credits are available for anyone who contributes to a retirement fund. Eligible taxpayers need to be above the age of 18 and cannot be enrolled as a full-time student (note that half-time enrolment may not disqualify you from receiving this credit).
11 Social Security Tax Credit
Social security taxes are only collected on a certain amount of income each year. Beyond that level, taxes for social security are not deducted from a taxpayer’s paycheck. This credit requires a taxpayer to look at the amount of social security withholding for the year to ensure overpayment has not occurred.
Because a tax credit is so effective in lowering a total tax bill and because it may even allow a taxpayer to get a refund check, looking into each of these potential tax credits is the best way to make Uncle Sam pay you at the end of the tax year instead of being required to write a check to the federal government.