Tax Credits Can Pay You at Tax Time
Did you know that you might be eligible for a valuable tax credit?
A tax credit is a dollar-for-dollar reduction of taxes owed. It is much more valuable to you than a tax deduction, which only saves you a percentage of each dollar deducted, that percentage being based on what tax rate your income lands you in. For instance, if you are in the 15% tax bracket, every dollar of deduction only saves you 15 cents of tax, whereas a $1 tax credit saves you just that, $1!
Some credits are even "refundable", which means you might receive a refund rather than owe any taxes at all, possibly getting back even more than you actually paid in to the system.
Here are four popular tax credits you should consider before filing your 2010 Federal Income Tax Return:
1. The Earned Income Tax Credit is a refundable credit for certain people who work and have earned income from wages, self-employment or farming. Income, age and the number of qualifying children determine the amount of the credit. The Earned Income Tax Credit reduces the amount of tax you owe and may also give you a refund. For more information see IRS Publication 596, Earned Income Credit.
2. The Child and Dependent Care Credit is for expenses paid for the care of your qualifying children under age 13, or for a disabled spouse or dependent, to enable you to work or look for work. It cannot be claimed for child care expenses incurred strictly for personal reasons. For more information, see IRS Publication 503, Child and Dependent Care Expenses.
3. The Child Tax Credit is for people who have a qualifying child. And what is a qualifying child exactly? A qualifying child for the child tax credit is one that meets the same definition as a qualifying child under the dependency rules and must be under age 17. The maximum amount of the credit is $1,000 for each qualifying child. This credit can be claimed in addition to the credit for child and dependent care expenses.
This credit is normally nonrefundable, although a few taxpayers that meet certain rules may have a portion of it be refundable. However, for 2010 only, all individual taxpayers with qualifying children are eligible for the refundable additional credit if (1) their tax liability does not fully absorb the otherwise allowable credit and (2) they have earned income in excess of $3,000. For more information on the Child Tax Credit, see IRS Publication 972, Child Tax Credit.
4. The Retirement Savings Contributions Credit, also known as the Saver's Credit, is designed to help low-to-moderate income workers save for retirement. You may qualify if your income is below a certain limit and you contribute to an IRA or workplace retirement plan, such as a 401(k) plan. The Saver's Credit is available in addition to any other tax savings that apply. For more information, see IRS Publication 590, Individual Retirement Arrangements (IRAs).
There are other credits available to eligible taxpayers. Since many qualifications and limitations apply to the various tax credits, taxpayers should carefully check their tax form instructions, the listed publications and additional information available at IRS.gov.
