Tips to save money on taxes by taking advantage of tax credits.
What’s A Tax Credit?
A tax exemption and a tax credit both save you money, but they do it in different ways. An exemption or deduction reduces your taxable income before tax is calculated on that amount. But a tax credit reduces the total amount of tax you must pay. Since a tax credit allows you to subtract taxes, dollar for dollar, it’s even better than a deduction! So I want to make sure you begin to think about every tax credit you can take for the 2008 tax year.
Taking the Standard Deduction
When it comes to tax deductions, everyone is entitled to what’s called the standard deduction. For 2008 the standard deduction is $5,450 for singles as well as for married people filing separately. For those who are married and filing jointly it’s $10,900. And for heads of household it’s $8,000.
You get to choose between taking the standard deduction or adding up all your individual deductions and using that amount. You can use the amount that’s higher and the most beneficial to you. I recommend going through the process of calculating your potential deductions, because the total could be higher than you think. According to the IRS, two out of three taxpayers take the standard deduction, rather than itemizing their deductions like mortgage interest, medical expenses, and charitable contributions, for example.
But let’s get back to tax credits. You can take every tax credit to which you’re entitled whether you take the standard deduction or not. Each year many taxpayers overlook tax credits because they simply don’t realize that they qualify to take them!
Often Overlooked Tax Credits
Consider whether you can take advantage of the following eight tax credits:
1.Earned Income Tax Credit (EITC). This is available to working families who earn less than $41,646 per year if married filing jointly. Childless workers with incomes under $15,880 also qualify. The maximum credit is $4,824 for those with more than one qualifying child.
2.Child Tax Credit. This is usually available if you have a child under the age of 17. The maximum credit is $1,000 per eligible child. This is in addition to the $3,500 dependent exemption that was discussed last week in show 96. However, the credit is reduced if your income is above a certain amount.
3.Child and Dependent Care Tax Credit. This one is available if you must pay someone to care for a dependent child under the age of 13, any other dependent you claim, or a spouse who is unable to care for themselves, in order for you to go to work.
4.Hope Education Tax Credit. This is available to help pay college tuition and fees for you or for your dependents when enrolled in school at least half time. The maximum credit is $1,800 and is available for the first two years of education. The credit is reduced if your income is above a certain limit.
5.Lifetime Learning Tax Credit. This is another education credit that’s available to help pay tuition and fees for you or your dependents even if they’re only enrolled in one college course. It’s also limited based on your income level. So maybe that computer class you took at the community college this year could actually help reduce your taxes!
6.Saver’s Tax Credit. This is available to workers who contribute to a retirement plan such as an IRA or a 401k. You qualify if you’re single or married filing separately and earn less than $26,500. If you file as a head of household, the income limit is $39,750 and for married filing jointly it’s $53,000. Remember that IRA contributions can be made until April 15th following the tax year. The maximum credit is $1,000 for singles and $2,000 for married people.
7.Energy-Savings Tax Credit. This credit is available if you make energy-efficient improvements to your home, no matter what your income level. This includes purchases such exterior doors and windows, water heaters, heat pumps, air conditioners, and furnaces. The maximum credit is limited to $500. There’s also a 30% credit for the cost of solar and fuel cell energy additions. You can learn much more about tax breaks for energy savings at the Department of Energy website at energy.gov. Some states may also give tax credits for energy saving efforts.
8.Alternative Motor Vehicle Credit. This is available to the original purchaser of a new, qualifying vehicle. So don’t miss out on a tax credit for any new hybrid you’ve purchased! I’ll include links in the show notes to qualified models and the tax credit amounts.
Please note that this is not a complete list of tax credits. There are others available to eligible taxpayers such as the Adoption Credit and the Credit for the Elderly or the Disabled. Some tax credits are refundable, which means that they could lower taxes below $0, to the point that you would receive a refund. Or if you’re already getting a refund, some tax credits would increase that amount. Be sure to refer to the official IRS website for more information at irs.gov.
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Use Form 8880 to claim the Saver’s Credit.
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