Common Tax Credits

Federal Tax Credits

Government Tax Credits

Tax credits have been one of the most known approaches for the entire tax burden reduction. These credits are dollar-for-dollar reductions in tax due amount.  Tax reductions reduce the taxes by simply reducing the taxable income as well. Tax credits are offering a dollar-for-dollar reduction for the taxation bill. The good news about it is that government tax credits can be ‘refundable’ which indicates that you may benefit from them even though you do not owe any taxes at all.

Basically, government tax credits reduce the tax amount wherein you have a liability. Tax deductions reduce the income tax amount, but the tax credit will reduce the tax liability directly. Most of the time, it is considered more valuable than the tax deductions of similar dollar amount. There are 2 general categories for tax credit, and these are non-refundable tax credit and refundable tax credit.

Non-refundable tax credits may reduce the tax liability to zero. You should include a tax liability on the Form 1040 line 46, Form 1040A line 18, or Form 1040NR line 43 to get your non-refundable tax credit. These categories of tax credit include:

  • Education credits
  • Child Tax Credit
  • Residential Energy Credits
  • Credit for the Disabled or Elderly
  • Retirement Savings Contribution Credit

On the other hand, the refundable tax credit may reduce the tax liability below 0 (zero). Since you can receive a refund from this credit type, they are called as refundable. Doing taxes online is the easiest way to have a tax refund. This tax credit includes:

  • Adoption Credit
  • Health Coverage Tax Credit
  • Excess Social Security Credit
  • Earned Income Credit
  • American Opportunity Credit

The following list refers to the common tax credits. It is important for every taxpayer to understand different kinds of government tax credits he may have.

Earned Income Tax Credit (EIC)

It is the refundable tax credit for families or individuals with low income. Its amount will depend on the family size and income level. Further details may be taken from IRS Publication 596. To qualify for it, you should earn income from self-employment or from wages, but the investment income must not exceed at $3, 100. You should also be in between ages 25 to 65 or have qualifying children while staying in United States more than six months and must not qualify as another person’s dependent. Regardless of your income, if you are married that files separately may not qualify for this tax credit.

Saver’s Tax Credit

This Retirement Savings Contribution Credit will provide credit for the part of qualified retirement contribution of an individual. You must be at least 18 yrs. old. You should not be a full time student for you to qualify. There are also AGI limits that may affect eligibility for the credit.

Child Tax Credit

This is the credit given to the taxpayers for every dependent child 17 years old and below.  It is usually provided at the end of a tax year still in question.  The qualifying child should meet the following criteria:

  • US citizen
  • Dependent on the return of the taxpayer
  • Did not provide more than half of his own support while on the tax year
  • Below 17 years old at the end of tax year
  • Stayed with the tax payer for more than half of the tax year.

The maximum credit amount is $1,000. This credit amount can be reduced for about $50 in every $1,000 AGI of the taxpayer over $75,000 or up to $110,000 for single and even MFJ.

Child and Dependent Care Tax Credit

This tax credit for dependent care and child expenses is significant. It usually depends on the income level or amount paid. Child tax credit is equivalent to the expenses’ percentage you paid for the child care less than the reimbursements from the social services agency or any programs.

Child and Dependent Care Tax Credit is made to offset your expenses that are associated with caring of children who are under 13 years old, or for the disabled dependent or spouse that you may work. It also begins at 35 percent of the expenses if the adjust income gross is less $15,000. It may phase out up to 20 percent of your expenses when the adjust income gross is over $43,000. The available maximum credit is about $3,000 for every qualifying child. For 2 or more qualifying children, it reaches about $6,000.

If in case you had child care that is out-of-home at the qualifying Child Care centers the centers meet state and federal requirements. They also have total enrolment of at least 6 children. To claim this credit, you have to report the amount you paid along with the child care center’s tax ID number, on the tax return with the use of Federal Form 2441.

If ever you have your own home child care, the rules may vary. IRS is going to require you to treat the workers for home child care as household workers. Among its exemptions are the part time baby sitters who are 18 years old below. It implies that the workers need to eligible for work and become responsible enough for the payroll taxations.

Lifetime Learning Credit Lifetime

Learning tax credits allow taxpayers reduction of the adjusted income gross up to $2,000 in each return. But bear in mind that the said amount is per return and not per student. It is available for all post secondary education year levels and courses for improvement or obtaining job skills. This is a non-refundable credit; thus it is bounded to the taxable income. This credit is not actually to:

  • Non-resident Aliens (NR)
  • Married Filing Separately (MFS) filers
  • Somebody who had taken the tuition deduction.

These are some of the common tax credits used by taxpayers. Other government tax credits involved are First-time home buyer credit, Making Worth Pay Credit, Alternative Minimum (AMT) Tax and Education Credit. Foreign Tax Credit and Social Security Tax Credit are other common government tax credits used by different individuals.

As you learn about these common government tax credits, you also have to deal with the issues and concerns related to tax law and tax code. These terms have distinct concepts that you must understand. In this way, you can comply with the rules and regulations provided by the law in federal tax. A tax law refers to the legal study that deals with regulatory, common law, constitutional and statutory rules that are constituted by the law applicable to taxes. People who are dealing with tax law are typically involved in various consultative roles as well as litigation.

You will be entitled to government tax credits according to the personal circumstances such as employee tax credit, civil partner’s tax credit or married person’s tax credit. The tax credits will be used in reducing the tax which is calculated on the gross pay. Most of these tax credits are refundable. But any excess government tax credits in the pay month or week are forwarded to the subsequent payment period/s in the federal tax year. Other credits involved that are not mentioned early are One Parent Family Credit, Incapacitated Child, Rent Credit, Guide Dog Allowance, Blind Credit and Age Credit.