By: Elaine E. Bedel, CFP®
If you haven’t filed your taxes by now, it is probably because you have to pay. Or, your taxes are more complicated than reporting your earnings and a few deductions. It really shouldn’t be this difficult, but there are lots of special elections and credits that you want to take advantage of, if you qualify. Of course, determining if you qualify can be tricky.
An area of our tax law that is becoming more complicated is the use of tax credits. Over the last decade numerous credits have been added to our tax provisions to assist with everything for education expenses to energy-efficient appliances to buying a house.
Tax Credit versus Tax Deductions
It is always better to receive a tax credit than a tax deduction. A tax credit is a dollar-for-dollar reduction of the taxes that you owe. A tax deduction reduces your taxable income, which is the dollar amount on which your tax is calculated. A tax credit is applied after your tax is calculated giving you a direct tax savings. There is a small catch. Some credits can only be applied to reduce the taxes that you owe, while others are “refundable”. A “refundable” credit will reduce any taxes that you owe plus pay any excess to you as a tax refund.
Credits Galore
To claim a tax credit, you will generally need to complete a special form. The form will determine whether you qualify and the amount of credit that you can receive. The credit amount calculated on the form is then reflected on your 1040 tax return.
Here are some of the tax credits available:
· Earned Income Credit. You may qualify based on income, age, and number of qualifying children
· Child and Dependent Care Credit. You may qualify if you work and you incur expenses for the care of a child under age 13, a disabled spouse or other dependent (such as a parent) while you are working. Form 2441
· Child Tax Credit. You may qualify for up to $1,000 for each qualifying child.
· Retirement Savings Contributions Credit. To encourage low-to-moderate income earners to save for retirement, an extra credit is received for a contribution to an IRA or employer provided retirement plan. You may qualify if your income is below a certain level. Form 8880
· Health Coverage Tax Credit. You may qualify for a credit equal to a maximum of 80% of health insurance premiums. This credit is only available to recipients of Trade Adjustment Assistance or those who receive a pension from the Pension Benefit Guaranty Corporation. Form 8885
· New or Existing Homebuyer Credit. If you purchased a home during the specified period and you meet the income requirements, you may qualify for a credit of $8,000 (new homebuyer) or $6,500 (existing homebuyer). Form 5405
· Education Credits. You may qualify for the Lifetime Learning Credit, American Opportunity Credit, or the Hope Learning Credit if you or a dependent incurred expenses for education. Form 8863
· Qualified Adoption Credit. If you adopted a child and your income is below a certain level, your expenses may qualify for a credit. Form 8839
· Residential Energy Credit. If you purchased an energy-efficient heating/cooling unit, water heater or other household appliance, you may qualify for a credit. Form 5695
Summary
For information on any of the tax credits noted above, you can go to the Internal Revenue Service website at www.irs.gov. In addition to the form that you are required to file with your tax return, there is generally a publication available that provides a detailed explanation of the credit along with who and what qualifies. We all agree that taxes are getting too complicated, but if you qualify for a tax credit, you don't want to miss it. Just take a deep breath and start researching!
