Tax Credits

 

Credits can help reduce your tax bill. There are many available credits. Missing one or more will cost you $$$. Read on for information on the most relevant.

 

 

   

Popular Tax Credits

Energy Tax Credits

You may be able to take the credits if you made energy saving improvements to your home located in the United States in 2010.

For improvements made in 2010, you can get an income tax credit of up to $1,500 for installing efficient new windows, insulation, doors, roofs, and heating and cooling equipment in your home. However, efficiency criteria will vary dependant on when these items are "placed in service" (installed). Who gets it? Individuals who install specific energy-efficient home improvements.What energy-efficient home improvements are eligible? The overall $1,500 cap can be reached in several ways with the purchase and installation of energy-efficient products that meet certain efficiency criteria:

  • Exterior windows: Includes skylights and storm windows.
  • Insulation, exterior doors, or roofs: Includes seals to limit air infiltration, such as caulk, weather stripping and foam sealants, as well as storm doors.
  • Central air conditioner, heat pump, furnace, boiler, water heater, or biomass (e.g. corn) stove: Starting in 2009, geothermal heat pumps are instead eligible for a separate tax credit

The  energy tax credit for 2011 is not nearly as generous as the credit was in 2010 when you were able to deduct up to $1500 as as long as it was 30% of the total installed cost of various home efficiency measures like window installations, hot water heaters and more.  2011 Energy Tax Credit Details:

  • The old generous credit titled the 2009-2010 American Recovery and Reinvestment Act (ARRA) – was allowed to expire and was not renewed.
  • The new energy efficient tax credit is only a 10% credit, up to a maximum of $500.  The prior cap had been up to $1500, which will expire on Dec 31, 2010.
  • Of that, only $200 for EnergyStar windows can be applied.
  • Furnaces are only allowed to get a $200 credit and they must now be 95% efficient, more stringent than the 90% requirement from 2009-2010.
  • Wood heating systems are eligible for a max $300 credit.
  • To reiterate, of the various programs you may take advantage of, the cap is $500 total IF you haven’t taken advantage of the credit previously.
  • Anyone that took advantage of the prior tax credits cannot utilize the credit in 2011 (no double-dipping).

Child Care Credits

If you paid someone to care for your child, spouse, or dependent last year, you may be able to claim the Child and Dependent Care Credit  on your federal income tax return. Below are 10 things the IRS wants you to know about claiming a credit for child and dependent care expenses.

  1. The care must have been provided for one or more qualifying persons. A qualifying person is your dependent child age 12 or younger when the care was provided. Additionally, your spouse and certain other individuals who are physically or mentally incapable of self-care may also be qualifying persons. You must identify each qualifying person on your tax return.

  2. The care must have been provided so you – and your spouse if you are married filing jointly – could work or look for work.

  3. You – and your spouse if you file jointly – must have earned income from wages, salaries, tips, other taxable employee compensation or net earnings from self-employment. One spouse may be considered as having earned income if they were a full-time student or were physically or mentally unable to care for themselves.

  4. The payments for care cannot be paid to your spouse, to the parent of your qualifying person, to someone you can claim as your dependent on your return, or to your child who will not be age 19 or older by the end of the year even if he or she is not your dependent. You must identify the care provider(s) on your tax return.

  5. Your filing status must be single, married filing jointly, head of household or qualifying widow(er) with a dependent child.

  6. The qualifying person must have lived with you for more than half of 2010. There are exceptions for the birth or death of a qualifying person, or a child of divorced or separated parents. See Publication 503, Child and Dependent Care Expenses.

  7. The credit can be up to 35 percent of your qualifying expenses, depending upon your adjusted gross income.

  8. For 2010, you may use up to $3,000 of expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit.

  9. The qualifying expenses must be reduced by the amount of any dependent care benefits provided by your employer that you deduct or exclude from your income.

  10. If you pay someone to come to your home and care for your dependent or spouse, you may be a household employer and may have to withhold and pay social security and Medicare tax and pay federal unemployment tax. See Publication 926, Household Employer's Tax Guide.

For more information on the Child and Dependent Care Credit, see Publication 503, Child and Dependent Care Expenses

 

Education Tax Credits

Two tax credits, the American opportunity credit and the lifetime learning credit, can help students and their parents defray education expenses. As the names indicate, these educational assistance options are credits rather than deductions, so they take a bigger bite out of your tax bill.

A deduction reduces your taxable income, which can, but is not guaranteed to, reduce your final tax bill. A credit, however, is subtracted directly from the final tax you owe.

American opportunity credit

The American opportunity credit was created as part of the 2009 stimulus bill. It is an enhanced version of the previous Hope educational assistance credit.

The American opportunity credit is worth $2,500, whereas claiming the Hope got you at most $1,800. Even better, up to 40 percent of the American opportunity credit is refundable, meaning you could get up to $1,000 back as a refund even if you don't owe any taxes.

There are income limits on who can claim the American opportunity credit, but they are greater than were those associated with the Hope credit. Now you can earn up to $80,000 if you're a single filer, twice that if married filing jointly, and still claim the full American opportunity credit. A reduced credit amount is available for single filers who earn up to $90,000 and joint filers making up to $180,000.

While the American opportunity credit is improved, it still has some restrictions. It can only be used to claim expenses incurred during the first four years of college. It also is temporary. Unless Congress continues it, the credit will expire at the end of 2012.

Lifetime learning credit

If your educational costs are beyond four undergraduate years of college, you'll want to look at the Lifetime learning credit. It lives up to its name. It can be used for undergraduate, graduate and professional degree courses for anyone.

This means a qualifying course you took to improve your current job skills or get new work could be partially paid for by the tax credit. If you meet Internal Revenue Service guidelines, you can count $10,000 of your education expenses. If you have a child also going to college and that child has eligible expenses, you can count those toward the $10,000 total, too, since the credit can be applied to all qualified education expenses in a taxpayer's family.

These costs, however, don't translate directly to your tax break. Rather, you get to claim up to 20 percent of your eligible lifetime learning expenses, which could net you a maximum $2,000 credit.

You can claim the lifetime learning credit in full if your modified adjusted gross income is less than $50,000 and you are a single filer or if it is $100,000 and you file a joint return with your spouse. The credit amount will be reduced if you make between $50,000 and $60,000 as a single taxpayer or between $100,000 and $120,000 and are a married couple filing jointly.

 

Making Work Pay Credit

In 2010, the Making Work Pay provision of the American Recovery and Reinvestment Act provides a refundable tax credit of up to $400 for working individuals and up to $800 for married taxpayers filing joint returns.

This tax credit will be calculated at a rate of 6.2 percent of earned income and will phase out for taxpayers with modified adjusted gross income in excess of $75,000, or $150,000 for married couples filing jointly.

For people who receive a paycheck and are subject to withholding, the credit will typically be handled by their employers through automated withholding changes. These changes may result in an increase in take-home pay. The amount of the credit will be computed on the employee's 2010 tax return filed in 2011. Taxpayers who do not have taxes withheld by an employer during the year can also claim the credit on their 2009 and 2010 tax returns.

For 2011 this credit has expired and is replaced by 'payroll tax holiday' that reduces social security withholding from 6.2% to 4.2%.


Retirement Tax Credits

Individuals who save for retirement may qualify for a federal tax credit.

If you make eligible contributions to certain eligible retirement plans or to an individual retirement arrangement (IRA), you may be able to take a tax credit. The amount of the saver's credit you can get is generally based on the contributions you make and your credit rate. Refer to Publication 590Individual Retirement Arrangements (IRAs), or the instructions for Form 8880 (PDF), Credit for Qualified Retirement Savings Contributions, for more information. If you are eligible for the credit, your credit rate can be as low as 10% or as high as 50%, depending on your adjusted gross income. The lower your income, the higher the credit rate; your credit rate also depends on your filing status. These two factors will determine the maximum credit you may be allowed to take. You are not eligible for the credit if your adjusted gross income exceeds a certain amount.

Use Form 8880 (PDF), Credit for Qualified Retirement Savings Contributions, to determine the rate and amount of the credit. Enter the amount of the credit on Form 1040 (PDF), or on Form 1040A (PDF). You cannot use Form 1040EZ to claim this credit