How to Maximize Tax Credits
A tax credit is generally much more useful than a tax deduction or write-off, because it decreases your tax liability dollar for dollar, while a deduction only lowers the amount of income you are taxed on. Some credits, called refundable tax credits, can result in money from the government at tax time, and even non-refundable tax credits can reduce your liability to zero. Here are some tax credits you might not have known about, so that you can get maximum usefulness out of them.
You are entitled to a whopping tax credit if you jump on the electric-vehicle bandwagon and buy an electric car such as a Nissan Leaf or Toyota IQ, both soon to be available. These big-ticket cars carry a big-ticket tax credit of up to $7,500 (not to mention the gas savings). Hybrid vehicles carry a more modest credit of up to $3,400.
Along these environmental lines, it might be time to outfit your home with more energy-efficient equipment. With home energy tax credits, you can get up to $1,500, or 30% of the item’s cost, to replace your doors, windows, roof or furnace with an Energy Star certified version. Only your principal residence, not a home under construction or a rental home, qualifies. If you go even more high-tech and install a solar panel or small wind energy system, you can carry this tax deduction forward to next year. Again, the savings on your energy bill, as well as the tax break, might make this decision pay for itself.
If you are struggling income-wise this year, the earned income tax credit is absolutely essential. Individuals with no dependents earning less than $13,460 a year, or $18,470 if married, can get a $457 refundable credit. The tax credit available to low-income parents is much larger: as high as $5,666 depending on your marital status and number of children.
Finally, the American Opportunity Tax Credit is a modification to the older Hope Tax Credit, paid for by the American Recovery and Reinvestment Act (ARRA). It is an education tax benefit that allows students, as well as the parents who may be paying their bills, a partially refundable tax credit of up to $2,500 to defray the costs of tuition, books and other education-related expenses. It has been expanded to cover four years of college instead of only the first two. If your income is above $80,000 a year as a single filer, and $160,000 a year for married filers, you unfortunately will not be eligible.