Everyone knows that tax deductions are great, but many people don't realize that tax credits are even better.
By cutting your tax bill dollar-for-dollar rather than just reducing your taxable income, tax credits are a can't-miss way to pay less to the IRS. Here are five tax credits you need to be aware of.
1. Earned Income Tax Credit.
The earned income tax credit is designed to help low- and moderate-income workers. In order to qualify, you have to earn money from a job or through self-employment, and your total income has to fall within certain limits based on your filing status and the number of qualifying children you have. The provisions of the credit are fairly complex, but the size of the credit is worth the effort, with maximum potential payouts of nearly $5,900 for those with three or more children. Best of all, unlike most tax credits, you can actually get a refund check if the amount of the earned income tax credit is more than your tax liability. Get more information from the IRS about the earned income tax credit here.
2. Child Tax Credit.
The Child Tax Credit allows you to reduce your tax liability by up to $1,000 for each child in your family under the age of 17. An income phaseout begins at $75,000 for single filers and $110,000 for joint filers that can reduce the credit you claim. To qualify, you have to meet a number of tests, including providing more than half of the child's support, claiming the child as a dependent on your tax return, and having the child live with you more than half the year. Find out more about the child tax credit on the IRS website here.
3. Child and Dependent Care Credit.
Those with children under age 13 can claim a portion of what they pay for child-care expenses, including daycare or babysitting. The key, though, is that the care provided has to enable you to work, and for joint filers, both spouses must have earned income from work in order to claim the credit. The percentage of expenses you can claim as a credit depends on your income, with a minimum credit of 20 percent and a maximum of 35 percent. The maximum amount of expenses you can claim is $3,000 for one child or $6,000 for two or more children, translating to a maximum credit amount of $2,100. Get more information from the IRS about the child and dependent care credit here.
4. Adoption Credit.
If you adopted a child, you can take up to $12,650 in related expenses as a tax credit. Taxpayers earning more than about $190,000 start to face a phase-out of the credit, which covers attorney fees, travel and meals, court costs, and other adoption-related fees. The credit used to be refundable, meaning that you could get a refund check if your taxes weren't high enough to use up the whole credit amount. But starting last year, you can only use the credit to offset existing tax liability. With somewhat complicated rules on the timing of when you can take the credit, you'll want to be sure to check out the IRS website for more information on the adoption credit.
5. Retirement Savings Contributions Credit.
Some taxpayers can get as much as a 50 percent credit on contributions they make to IRAs and other retirement-savings vehicles. The credit applies to up to $2,000 of retirement contributions for each spouse, and the credit ranges from 10 percent to 50 percent based on filing status and your income. In general, single filers making up to $28,750 and joint filers with incomes as much as $57,500 can get at least some money back on this tax credit, helping to offset what you set aside for your retirement. Learn more from the IRS about the retirement savings contributions credit here.
Get the Credit You Deserve
The benefits that tax credits provide can be huge, so be sure not to miss out on taking any credits that you're entitled to. There's no better way to reduce your tax liability and get a bigger refund check back from Uncle Sam.
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