Top Tax Credits For Your Federal Tax Return
January 12, 2009
Some of the top tax credits such as the Child Tax Credit, the Hope Credit, and the Earned Income Tax Credit don’t apply to everyone but if you qualify for credits such as these you could save significant amounts on your tax bill.
While many people hope for a big chunk of money in the form of a tax refund each year, the best approach is typically to pay fewer taxes during the year and get a smaller refund so you have that money to use during the year.
If you received a huge return this year, be sure to re-evaluate the W-4 form that you filled out with your employer. If you’re withholding too much for federal taxes from your pay check you’re basically giving the government a free loan! Making this change is one of the easiest ways to give yourself a raise next year.
On the flip side, some of you may owe more taxes than you withheld, and no one wants to write an unexpected check in April. To avoid this, make sure you’ve researched the available tax credits offered in the federal tax code.
Tax Credit vs Tax Deduction
Credits are better than deductions. Comparing a $1,000 tax credit to a $1,000 tax deduction, assuming a person earns $60,000 a year and is in the 25% tax bracket, the credit will let you keep $750 more than the deduction.
If you owe $15,000 in taxes a $1,000 credit will reduce the amount you owe to $14,000.
A deduction, on the other hand, only reduces the amount of your income that can be taxed. So a $1,000 deduction reduces your taxable income to $59,000 and you still owe $14,750
Tax Credit – $14,000 owed
Tax Deduction – $14,750 owed
Here are some tax credits that can cut your tax bill if you qualify:
Earned Income Tax Credit
A previous contributor on this site, Tina, had a personal experience with the earned income tax credit, read it for some more detail on what the credit is all about. The IRS has an EITC Assistant program on their website to help you figure out if you qualify for the credit and how much you are entitled to receive.
The Child Tax Credit
You can receive a $1,000 tax credit for each child under the age of 17 born before the end of the year. See, having kids isn’t THAT harsh on your bank account! Keep in mind, this credit begins to phase out when your AGI exceeds $110,000 when filing married, jointly and $75,000 for single filers.
This is eligible to students in their freshman and sophomore years of college at an accredited two or four year institution. You can receive up to $1,650 for the credit, and it is based on a percentage of the amount of tuition you paid throughout the year.
Lifetime Learning Credit
This credit is for any student past high school at any time of their life. You can use it if you are a junior or senior in college, or if you are just taking courses to improve job skills or personal knowledge.
You do not need to be working towards a specific degree to receive this credit. This is also based on a percentage of the total amount you paid for tuition throughout the calendar year. Remember, these credits also phase out depending on adjusted gross income, and you cannot claim the credit if you are still considered a dependent on your parent’s tax return or if you file married, separately.
Taxes can be Tricky
Always be sure to consult a tax professional such as a certified public accountant if you are unsure about qualifications of a tax credit before you claim it. We’re not tax professionals, we’re just offering up a review of tax credits, now it’s your job to follow up with some research. Don’t run the risk of taking a credit and then finding out later that the IRS wants the money back with fees and interest!
Happy tax credit hunting!
All posts by Erik