Ten Common Income Tax Credits

Unlike income tax deductions, which reduce your taxes by reducing your taxable income, tax credits offer a straight up, dollar-for-dollar reduction of your tax bill. In other words, a $500 tax credit will reduce your tax bill by $500. In contrast, a $500 tax deduction will reduce your tax bill by anywhere from $50-$175 (depending on your income tax rate). Better still, many tax credit are “refundable, ” which means that you can take advantage of them even if you don’t owe any taxes.

What follows is a rundown of common income tax credits. While this list is by no means exhaustive, it’s a good starting point as you begin pulling your taxes together.

Earned Income Tax Credit

The Earned Income Credit (EIC) is a refundable for low-income individuals/families. The amount of this credit depends on income level and family size. Details can be found in IRS Publication 596.

Saver’s Tax Credit

The Retirement Savings Contribution Credit provides a credit for a portion of an individual’s qualified retirement contributions. You have to be at least 18 years old and not a full time student to qualify. There are also AGI limits that might affect your eligibility for this credit. See Chapter 5 of IRS Publication 590 for details.

Child Tax Credit

The Child Tax Credit is a credit given provided to taxpayers for each dependent child who is under the age of 17 at the end of the tax year in question. A maximum of $1000 can be claimed per child, though the credit is limited based on your AGI. There is also an additional child tax credit that is available for those that are eligible for the tax credit, but have three or more qualifying children. Details can be found in IRS Publication 972.

Adoption Tax Credit

The Adoption Tax Credit applies to qualifying expenses associated with adopting a child. Note that the credit might be higher if you adopt a child with special needs. You should also be sure to check with your employer, as many benefits packages offer reimbursement of a portion of the costs associated with adoption. For details on this credit, see IRS Topic 607.

Child and Dependent Care Tax Credit

The Child and Dependent Care Tax Credit is intended to offset expenses associated with the care of children under the age of 13, or for a disabled spouse our dependent, such that the taxpayer can work. See IRS Publication 503 for details.

Education Tax Credits

The Hope Credit and Lifetime Learning Credit are intended to defray expenses related to education. The Hope Credit applies to the first two years of post-secondary education, whereas the Lifetime Learning Credit is available for all post-secondary education for an unlimited number of years. See IRS Publication 970 for details.

Social Security Tax Credit

As you may or may not know, Social Security taxes are capped such that, if you earn enough money, you don’t have to pay Social Security taxes on the overage. For 2008, the limit was $102, 000. While your employer should respect this limit when figuring your withholding, it’s likely that you had too much money withheld if you had multiple employers for a total of more than $102k in earnings. This credit allows you to recover the excess withholding. See IRS Topic 608 for details.

Foreign Tax Credit

The Foreign Tax Credit is intended to reduce the double tax burden when income from a foreign source is taxed by both the originating country as well as the United States. This credit applies not only to individuals that have worked in foreign countries, but also to individuals that have received income from certain foreign investments (including many international mutual funds). See IRS Publication 514 for details.

AMT Credit

If you previously paid the Alternative Minimum Tax (AMT), but are not liable for it this year, you might qualify for the AMT Tax Credit. This credit allows you to recover a portion of your previous AMT payments. See IRS Topic 556 for details.

First-Time Homebuyer Credit

Finally, we have the First-Time Homebuyer Credit. This one has actually been in the news a lot lately, and we’ve talked about it some here. In short, this is a $7500 tax credit (that’s the maximum amount; it’s actually 10% of the purchase price up to $7500) provided to first time homebuyers who purchase a house between April 9, 2008 and June 30, 2009. As things currently stand, this “credit” is an interest free loan that has to be repaid in 15 equal yearly installments. That being said, there has been a lot of talk about turning this into a refundable tax credit as part of the forthcoming economic stimulus package. See IRS Topic 611 for details.

Update: The Senate has pushed this up to a $15, 000 homebuyer tax credit.

7 Responses to “Ten Common Income Tax Credits”

  1. Anonymous

    The government caps this credit at 3 children, as to say, you get the same rebate for 3 children as you do for 20. The idea of pumping out kids for a tax refund doesn’t exist, at least in sane circles.

  2. Anonymous

    i love the idea of pumping out more kids to get more tax money every year we time out kids so we get to claim a new one every year so far we got six in a row hoping she will push out number 7 by dec 31 lol

  3. Anonymous

    I agree with you, and I just meant that they shouldn’t pay taxes under the current system. If we want to talk about what should or shouldn’t be, then I say bring in the flat tax and take out all the deductions and credits.

    I understand the idea that smaller families are subsidizing larger families, but then, is there anything in this world where somebody isn’t subsidizing someone else? You can’t really get away from it. “Fair” in the strict sense of the word doesn’t exist. The other thing you could look at is, if you’re raising a larger family the right way, then that family will have a lot more to give back to society and the economy than a smaller family or an individual. Not that they’re better…there are just more of them. As far as family memberships go, the business decision might be do we make it affordable for the family or do we risk not having any of that family become a member?

  4. Sandwich Artist: As someone with more kids than average (four), I disagree. I don’t think that the government should be in the business of handing out tax breaks to people simply because they choose to have kids. As long as those things are on the books, I will take advantage of them (when eligible), but I would prefer that they not exist.

    On a vaguely related note, I also don’t think it’s fair to charge the same amount for “family” memberships, insurance coverage, etc. regardless of family size. Yes, we benefit from it since we have a large family, so I probably shouldn’t complain. That being said, it costs a lot more to insure my family than it does a family that has just one child, yet we both pay the same amount. This means that smaller families are essentially subsidizing larger families, such as mine. That doesn’t sounds fair to me despite the fact that it benefits us.

  5. Anonymous

    It’s always nice to get a discount for having kids! It makes me wonder if the families from TV shows like “Jon & Kate Plus 8” or “18 Kids and Counting” have ever paid taxes!

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