Lower Your Taxes By Claiming Tax Credits On Form 1040
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 credits.” Tax credits do not reduce your taxable income; they actually reduce the amount of tax that you owe. In some cases, a tax credit can reduce your tax liability to beyond zero, with the extra amount given to you as a tax refund (known as “refundable credits”).
There are a variety of tax credits available today that are designed to help people qualify for financial relief. 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.
Here are some examples of popular federal tax credits:
Education Tax Credits
The American Opportunity Tax Credit (AOTC) provides a maximum $2,500 credit for each student pursuing a degree, for up to four years of post-secondary education. The Lifetime Learning Credit (LLC) offers a tax credit of up to $2,000 for qualified education expenses. Note that the student may elect to receive only one education tax credit and certain income limitations apply. For more information, see Education Tax Breaks for Your Federal Return.
Child Tax Credits
According to a report issued by the U.S. Department of Agriculture, it will cost the average middle class family approximately $233,610 to raise a child to the age of 17. That’s about $14,000 annually. The Child Tax Credit can help by providing up to $2,000 for each qualifying child under the age of 17. For more information, see The Child Tax Credit.
Housing Tax Credits
The popular First-Time Homebuyer Tax Credit expired in April 2010. However, if you purchased a home in 2008, 2009, or 2010 and you never claimed this credit, you might still be able to. Note that the home must be your primary residence and eligibility varies depending on the year you purchased.
The Low Income Housing Tax Credit (LIHTC) program started in 1986 under President Reagan. It provides incentive for private sector investments in affordable rental housing. Like all tax credits, the LIHTC gives you a dollar-for-dollar reduction of your income tax liability.
The Earned Income Tax Credit (EITC)
The Earned Income Tax Credit (EITC) was created to help workers and families with modest incomes by reducing the amount of tax they owe and, in many cases, providing a tax refund. The amount you are eligible to claim depends on your filing status and the number of qualifying dependents you have. For more information, see What You Should Know About the Earned Income Credit.
Tax Credits for the Elderly and Disabled
If you are age 65 or older, or disabled, you may be able to claim the “Credit for the Elderly or the Disabled” on your federal income tax return. To qualify as disabled for the purposes of this credit, you must be retired, permanently and totally disabled, and receiving taxable disability benefits. The amount for this tax credit ranges between $3,750 and $7,500. For more information, see IRS Publication 524 (Credit for the Elderly or the Disabled).