Tax credits can reduce the taxes you owe. Credits differ from tax deductions because they do not reduce your taxable income. Instead, tax credits are subtracted from your actual tax liability. Most tax credits are not refundable and can only decrease your tax bill. However, some tax credits are refundable, which means they not only reduce you taxes, they may also provide a larger refund if the credit is larger the amount of taxes you owe.
Earned Income Credit
The Earned Income Credit (EIC) is a refundable tax credit that is available to individuals and families with earned income. The IRS defines earned income as wages or tips from a job, self-employment income and pay earned from combat in the armed forces (Ref 2).
The guidelines for eligibility and credit amount vary by income, filing status and number of qualifying children. For EIC purposes, a qualifying child is any child under age 18 that lived with you for more than half the year. This can include your children, stepchildren, foster children, adopted children, grandchildren, and nieces and nephews.
Individuals without children can earn no more than $13,440 and childless married couples can earn no more than $18,440. In both of these groups, you must must be at least age 25 but under age 65 to qualify. Head of Household filers can earn between $35,463 and $43,279 depending on the number of qualifying children. Married couples with children can earn between $40,463 and $48,279 depending on the number of qualifying children. Married couples must file jointly to receive the credit. (Ref 1) As of 2009, The maximum EIC is between $457 and $5,657 (Ref 3).
Energy Efficiency Credits
The IRS offers credits to households that purchase and use energy-efficient appliances, windows, doors, insulation and alternative energy sources. The tax credit for buying energy-efficient appliances such as windows, dishwashers, pellet stoves and other products can be up to $1,500 total for tax years 2009 and 2010. Alternative energy sources garner credits up to 30 percent of the purchase price with no maximum amount (Ref 6).
Child and Dependent Credits
You can take tax credits for the costs of caring for a child or disabled dependent. To qualify for the Child and Dependent Care Credit, you must have earned income and work-related child or dependent care expenses. If you are married, both you and your spouse must have earned income unless one of you is a full-time student. The IRS states that child care expenses for children under age 13 as well as dependent care expenses for disabled people of any age are eligible for the credit.
Payments to your spouse or another dependent child under 13 do not qualify for the credit. Total expenses cannot equal more than your income or, if you are married, your spouse's income if it is lower. You cannot include expenses over $3,000 for one dependent or $6,000 for two or more dependents, as of 2009. Credit amounts are between 20 and 35 percent of total expenses, depending on income. (Ref 5)
The IRS also provides the Child Tax Credit for people with dependent children under 17. This credit lowers your tax liability by up to $1,000 per child depending on your income. Head-of-household and widowed filers cannot earn more than $75,000 per year, while married people filing separately cannot earn more than $55,000. Married people who file jointly can earn up to $110,000.
If you are not eligible for the full Child Tax Credit, you may be able to take the refundable Additional Child Tax Credit which further lowers your tax liability and may give you a larger refund. (Ref 7)
Elderly and Disabled Credits
Elderly and disabled tax credits reduce tax liability for low- and moderate-income taxpayers. To qualify, you must be age 65 or under 65 and permanently disabled. Married couples have to file jointly to receive the credit, even if only one partner qualifies. Married couples with two qualified partners cannot have taxable income, such as wages, in excess of $25,000 or nontaxable income, such as Social Security, over $7,500, as of 2009. Couples with only one qualified partner cannot have taxable income over $20,000 or nontaxable income over $5,000.
If you are married but your spouse did not live with you during the year, you can file separately and qualify for the credit if your taxable income is under $12,500 or your nontaxable income is under $3,750. The maximum credit, or initial amount, is between $3,750 and $7,500 depending on income and filing status. You have to subtract your nontaxable income from the initial amount. You also have to subtract from $5,000 to $10,000 in excess adjusted gross income depending on filing status. The total credit you receive is 15 percent of your readjusted gross income. (Ref 8)
The IRS provides three education-related tax credits that decrease your taxes. The Hope Credit applies to tax years 2008 and earlier and provides up to $3,600 per student, per year for the first two years of higher education.
The American Opportunity Credit is a modified version of the Hope Credit for tax year 2009 and beyond that provides up to $2,500 per student, per year for the first four years of college. The American Opportunity Credit is 40 percent refundable, which may increase your tax refund.
The Lifetime Learning Credit provides up to $2,000 per year, or $4,000 for students in Midwest disaster areas. This credit is available for the entire length of the student's education. There are no income or filing status requirements to take any of these credits. (Ref 9)
Retirement Contibutions Credit
The IRS allows you to take a tax credit for a portion of the contributions you make to retirement accounts such as a 401k, 403b, IRA and Savings Incentive Match Plans (SIMPLE). You can include contributions up to $2,000 per person per year.
Eligibility and credit amount depends on your adjusted gross income (AGI) and filing status. To qualify for the credit, single, widowed and married filing separately filers cannot have AIG over $27,750. Married couple who file jointly cannot have AGI over $55,500. Head-of-household filers cannot have more than $41,625 in income. Credit amounts are between 10 and 50 percent of contributions, depending on income, and may reduce your tax liability to zero. (Ref 4)
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