Tax credits are much better than tax deductions. A deduction only lowers the amount on which your taxes are calculated but a credit is like cash in the bank. A tax credit is subtracted from the taxes you owe. That’s why tax credits trump tax deductions any day of the week, but especially at tax time.
Suppose you have income of $20,000 and you’re married filing jointly. Your taxes due would be $2,154. A $1,000 deduction lowers your taxable income to $19,000 and lowers your tax burden to $2,004 (saving you $150). But a $1,000 tax credit means your tax obligation gets lowered from $2,154 to $1,154 – saving you $1,000.
Yes, tax credits are better than tax deductions.
But tax credits are rare things. They aren’t bandied about too often and Congress usually reserves them for people with lower income levels. If you find that you’re eligible to claim one or more tax credits, your tax return can easily generate a sizable tax refund when you utilize those credits … even if you didn’t pay a dime in taxes.
Here are some tax credits you may have missed:
The top tax software preparation programs such as TurboTax, H&R Block, and Complete Tax will make certain you don’t miss any of these tax credits, but it’s up to you to make certain you enter the correct information. At the onset, you’ll be asked about things that happened in your life over the past year so make certain you don’t leave out anything relating to the following tax credits:
The Earned Income Tax Credit
This is for individuals who earn less than $9,078 from either wages, self-employment or farming. You can claim this tax credit it the amount of taxes you owes is less than the amount of the credit. In that case, you may be eligible for a refund of the remaining tax credit available.
The Child and Dependent Care Credit
This tax credit is designed to help pay for expenses to care of your qualifying children under age 13, or to care for your disabled spouse or other dependent while you work or while you look for work.
The Child Tax Credit
This tax credit is available to you if you if have a qualifying child, and can be claimed while you claim the Child and Dependent Care Credit.
Lifetime Learning Tax Credit
This tax credit was designed to help to offset the (high) cost of education. It’s available for all years of postsecondary education and for courses to acquire or improve job skills. The maximum credited is limited to the amount of tax you must pay on your return. The student does not need to be pursuing a degree or other recognized education credential. Qualified expenses include tuition and fees, course related books, supplies and equipment. The full credit is generally available to eligible taxpayers who make less than $60,000 or $120,000 for married couples filing a joint return.
American Opportunity Tax Credit (Hope Extended)
The new credit makes the Hope Credit available to a broader range of taxpayers, including many with higher incomes and those who owe no tax (eligible taxpayers include those who make less than $80,000 or $160,000 for married couples filing a joint return). This credit can be up to $2,500 per eligible student and is available for the first four years of post-secondary education. Forty percent of the credit is refundable, which means that you may be able to receive up to $1,000, even if you owe no taxes. The student must be pursuing an undergraduate degree or other recognized educational credential and must be enrolled at least half time for at least one academic period. The good news is that your expenses can include tuition and fees, coursed related books supplies and equipment.
Note: If you’re using TurboTax or H&R Block Online, make sure you indicate that you could possibly have qualifying educational expenses to consider. When you do, both of those software programs will automatically help insure that you’re eligible for the tax credits based on your income and other eligibility requirements.
Tax credits truly are better than tax deductions.
The Wisdom Journal Tax Links
- 25 Tax Audit Flags
- What Are My Chances of Being Audited?
- TurboTax vs H&R Block Online: Which Is Better?
- 57 Avoidable Tax Mistakes
- Putting Off Filing Your Taxes Because You Owe Money This Year?
- 2 Million US Taxpayers Overlook $4 BILLION in Sales Tax Deductions – Are You Leaving Money On The Table?
- What Triggers An IRS Tax Audit?