How to Reduce AGI With Tax Credits
Taxpayers can reduce their adjusted gross income (AGI) using a variety of credits. Credits, unlike deductions, are directly subtracted from a taxpayer's AGI, greatly reducing his or her taxes. Make sure you are current about the credits to which you are entitled; since tax law changes frequently, always consult the most current version of Form 1040 for a list of the most recent tax credits.
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Instructions
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Credits: Part I
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Take the credit for child and dependent care expenses. This credit reduces AGI by subtracting at least a portion of the money a taxpayer spent on items such as daycare, after-school care and nursing home care for a dependent parent. You must fill out Form 2441 to claim this credit. See the resources section below for a link to all IRS forms online.
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Claim the credit for the elderly or disabled. Most taxpayers over age 65 or those who are permanently and totally disabled (even if under age 65) qualify for this credit. You must complete Schedule R to claim this credit.
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Make sure to account for any education credits to which you are entitled, such as the Hope and Lifetime Learning credits. For taxpayers who fall below a certain income level, there is a sliding scale as to how much education expenses can be deducted from AGI. See IRS Form 8863 for more details on this credit.
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Complete Form 5695 to qualify for residential energy credits. Home improvements such as new doors, windows, roofs, solar energy panels and propane tanks can save taxpayers big bucks at tax time.
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See if you qualify for the Foreign Tax credit. Fill out Form 1116 to determine the amount for which you qualify. If you paid taxes in another country or U.S. possession, you may be entitled to a credit for those taxes.
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Account for any children you have by taking the child tax credit. Fill out Form 8901 to determine the extent of your credit for qualifying children who are not dependents. Many taxpayers can take credits of up to $1,000 per child depending on a variety of factors; see the instructions for Form 1040 for more information.
Credits: Part II
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Use Form 8880 to account for any retirement savings contributions credits. Contributions to regular and Roth IRAs, 401(k)s and other investment vehicles may earn taxpayers credits to deduct from their AGIs.
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Fill out Form 8396 to see if you qualify for the mortgage interest credit. This credit only applies to holders of qualified mortgage credit certificates issued by state or local governmental units or agencies. If you live in the District of Columbia, complete Form 8859 to apply for the first-time homebuyer credit.
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Collect all applicable paperwork and receipts and fill out Form 8839 to apply for the Adoption Expenses credit. If you adopted a child during the past year, you may be entitled to recoup some of your expenses.
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Think of your business expenses (if you own your own business or are self-employed) over the past year. Some of your expenditures, such as welfare-to-work programs, disabled access costs, Indian employment costs, energy efficient fuel efforts and alternative vehicle usages may qualify your business for General Business Credits, listed on Form 3800.
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Utilize Form 8801 if you wish to claim a credit for payments of the prior year's minimum tax. Depending on your income, you may be entitled to a credit of taxes you paid last year.
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Submit Form 1040 to the IRS, along with all the supporting forms and schedules listed above. Enjoy the tax benefits you have gleaned from claiming a variety of credits that reduced your AGI.
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