Learning more about tax credits and how they affect you can be a big help when you files your taxes. You can find ways to legally lower your tax obligations and, in some cases, get a refund with them. That means you’ll have more money in your pocket that you can use to reach your financial and/or personal goals.
What are Tax Credits?
Tax credits directly reduce your tax liability. There are also either refundable or nonrefundable tax credits. Refundable tax credits are tax credits that you can get back as a refund if your credits outweigh your liabilities. With nonrefundable tax credits, you do not get a refund even if your credits are more that your tax burden.
What’s the Difference Between Tax Credits and Deductions?
Some people think that tax credits and deductions are the same. That’s not true; there are some subtle differences. Tax deductions are slightly different because they reduce your taxable income, not the tax burden that you owe.
What are Some Common Tax Credits Available?
Since tax laws, credits, and deductions can change every year, make sure you stay update to with them. Software like Turbotax can walk you through the process, reducing your stress come tax time, showing you what credits you’re eligible for with little work on your end.
What are some popular tax credits that you may qualify for?
- Earned Income Credit (IRS Publication 596) – This refundable tax credit is geared for low income individuals and families as way to relieve their tax burden. There are income requirements that must be met to receive this tax credit.
- Child and Dependent Care Credit (IRS Publication 530) – This tax credit is for individuals and families who provided care for a qualifying person. Depending on your adjusted gross income, this credit can be used toward a maximum of 35% of qualifying expenses.
- Lifetime Learning Credit (IRS Publication 970) – Tuition and other qualifying education expenses can be claimed with this tax credit.
- Retirement Savings Contributions Credit (IRS Publication 4703) – This tax credit is based on your contribution to qualifying retirement plans and your income.
Depending on when you bought your house in 2010, you could qualify for the First-time Homebuyer Credit. We were able to make the deadline and we took advantage of an extra $8,000 to help us reach our financial goals.
Your Take on Tax Credits
Even if you’re not a fan of taxes, it’s to your financial advantage to make sure you try to get every tax credit you can qualify for when you file your taxes. Which tax credits do you take advantage of this upcoming tax season?