Overview of Tax Credits
Ask anyone and they will surely tell you they pay too much in taxes. Fortunately, the federal government and many states have responded by creating a means to rebate taxes in the form of tax deductions and tax credits. Tax credits are not deductions to your income; they actually reduce the amount of income tax that you owe.
There are a variety of tax credits available today that are designed to help people qualify for some type of relief from financial stress. Whether you are buying a home for the first time, raising children, pursuing an education for your child or yourself, are elderly or disabled, or you’re simply trying to stretch your dollars, there may be a suitable tax credit for you. Common types of tax credits are described below.
Education Tax Credits
Every year we hear about the skyrocketing costs of higher education. Sending a child to college is a major financial commitment and let’s face it, most kids do not qualify for academic or athletic scholarships, grants, or other “free rides.” These days, a lot of adults are also going back to school in hopes of acquiring more education or training to get a promotion, earn more money, or find a more rewarding job.
In response, the federal government has created two major education tax credits to help reduce the costs of obtaining a higher education. The American Opportunity Tax Credit (AOTC) is a modified version of the Hope Scholarship Credit for tax years 2009 and 2010. The AOTC provides a maximum $2,500 credit for each student pursuing a degree, for up to 4 years of post-secondary education. The Lifetime Learning Tax Credit offers a credit of up to $2,000 ($4,000 for students in certain disaster areas) for qualified education expenses. Note that the student may elect to receive only 1 education tax credit and certain income limitations apply.
Child Tax Credits
Raising a child is expensive. It will cost the average middle class family approximately $286,050 to raise a child (born in 2009) to the age of 17, according to a report issued by the U.S. Department of Agriculture. Child tax credits can help by providing up to $1,000 for each qualifying child under the age of 17.
Housing Tax Credits
Buying a home is typically the largest single purchase an individual will ever make in their lifetime. Although housing prices in most regions have experienced a significant decline over the past few years, many industry analysts believe that there has never been a better time to purchase real estate. Additionally, there are some housing tax credits you may be able to take advantage of.
The federal tax credit ― up to $8,000 for first-time home buyers and $6,500 for repeat home buyers ― has expired for home purchases where a binding sales contract was signed by April 30, 2010. But Congress has extended the closing date to provide buyers (who had binding sales contracts in place by April 30, 2010) with additional time. Qualified buyers now have until September 30, 2010 to complete the purchase. Additionally, members of the military and other qualified service members who were on active duty outside the United States for at least 90 days between January 1, 2009 and May 1, 2010, may qualify for a one-year extension.
Providers of affordable housing may qualify for the Low-Income Housing Tax Credit (LIHTC) program which was created by the Tax Reform Act of 1986. The LIHTC is an alternate method of funding housing for low- and moderate-income households.
Earned Income Tax Credit
The Earned Income Tax Credit (EITC) was created to help workers and families with modest incomes by reducing the amount of tax they owe or by providing a tax refund. Rising unemployment, reduced wages, shorter work hours/weeks, and failing businesses have led the government to implement the Earned Income Tax Credit Stimulus Increase in 2009 and 2010 with new qualification and income limits. The amount for which you may be eligible depends on your filing status and the number of qualifying dependents.
Elderly and Disabled Tax Credits
If you are age 65 or older, or disabled, you may be able to claim the Elderly and Disabled Tax Credit on your federal income tax return. To qualify as disabled, you must be retired, you must be permanently and totally disabled, and you must be receiving disability benefits.