How to Pay Less in Taxes (Part 1)
Money Girl explains tax credits and how they help you pay less tax and save more money.
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Credit #1: The Saver’s Tax Credit
The Saver’s Tax Credit is an incentive to save for retirement. It repays you as much as $1,000 (or $2,000 if you’re married filing jointly) when you save for the future, which is a very nice benefit.
This credit is available for low- and moderate-income workers and those who are self-employed who contribute to a retirement account, such as an Individual Retirement Arrangement (IRA) or a workplace plan, like a 401(k) or 403(b). To claim the Saver’s Tax Credit you can’t be a dependent on someone else’s tax return, be younger than 18, or be a full-time student.
While the deadline for funding workplace plans is generally December 31, there’s more time with an IRA. You have until tax day, which is typically April 15, to add money to a new or existing IRA, for the prior tax year.
Credit #2: The American Opportunity Tax Credit
The American Opportunity Tax Credit helps you pay for college expenses, such as tuition, fees, and books. It’s worth up to $2,500 per eligible student for the first 4 years of higher education.
This credit helps low- and moderate-income students who are pursuing a degree and are enrolled in school at least half time. You can’t double up and also claim another type of education credit, nor can you have a felony drug conviction to be eligible for it.
Tax Credit #3: The Earned Income Tax Credit
The Earned Income Tax Credit (EITC) was created to help low-income working individuals and families manage the burden of taxes. In general, if you earn less than about $51,000 this tax credit can give you a substantial tax refund.
The IRS has a calculator called the EITC Assistant in English and Spanish to help you find out if you qualify. They also have tax credit calculators for prior years.
If you find out that you were previously eligible for the EITC, but didn’t claim it, you can file an amended return. To correct a tax return, you must file Form 1040X within 3 years after the due date of your original return.
Tax Credit #4: The Child and Dependent Care Credit
The Child and Dependent Care Credit helps you pay someone to care for those who depend on you, so you can work or look for work. It could be a child under the age of 13, a disabled spouse, or an older person who lives with you.
This credit is worth up to 35% of your qualifying care expenses, depending on your income. When figuring your credit, you can claim up to $3,000 of costs for one qualifying dependent, or up to $6,000 if you have 2 or more.
To claim the Child and Dependent Care credit complete Form 2441.
Tax Credit #5: The Child Tax Credit
The Child Tax Credit helps families pay for the cost of supporting children. It’s worth as much as $1,000 per qualifying dependent, depending on your income.
To claim a child, he or she must be younger than 17 and have lived with you for more than half of the tax year. To learn more or to claim the Child Tax Credit use Form 1040 (Schedule 8812).
I know taxes aren’t the most fun or fascinating financial topic. Even Albert Einstein said, "The hardest thing in the world to understand is the income tax."
But no matter what we think of them, taxes are here to stay. So join me next week for Part 2 of this series when I’ll give you a simple way to make sure you never miss a money-saving tax deduction.
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