How to Calculate Tax Credit
A tax credit is different from a deduction in that it directly reduces the amount of tax you owe, rather than reducing the amount of income that is taxed. A tax credit, therefore, can result in valuable savings on your federal return. Among many others, credits are available for adoption expenses, retirement savings contributions, dependent care, and college tuition. Most are limited by income or other considerations, but they are sometimes phased out so you may be able to claim at least a partial credit.
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Instructions
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Find credits. A good first step is to research the available credits. Find the section for tax credits on your 1040. (Some credits, the retirement savings contribution credit, for example, cannot be claimed on the 1040EZ.) Make a list of the form numbers (or 1040 instruction page number) for each credit for which you might qualify. Write down the number even if you're not sure. Many credits are listed by number only. Write all of these down. Most of them you will cross off your list as not applicable as soon as you see the form's title, but it will only cost you a few minutes time to investigate. (And don't forget the Earned Income Credit and a few others that are listed in the "payments" section of the 1040.)
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Check the rules. Once you have your list of forms, go to the IRS Website where all tax forms are listed by number. (See Resources.) Some of the forms may have separate instructions; most will describe right at the top who can claim the credit. Cross the number off your list if you don't qualify.
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Gather documents. For any credits left on your list, print out the form (or call 1-800-TAX-FORM to receive a copy by mail). Gather any supporting documents. For some credits, written proof of your expense may be necessary. Receipts for educational expenses or statements from your bank confirming IRA contributions are some examples.
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Complete form(s). Once you have the proper forms or worksheets, calculating your credit is simply a matter of filing in all the blanks. The forms tell you step by step which numbers to add or subtract. Follow the directions carefully, and you will have calculated your credit at the end of the form. Pay attention to all the exceptions and conditions as you complete the forms to calculate the amount of your tax credit. The IRS can impose penalties for mistakes that it deems overly careless. Some credits, the Hope and Lifetime Learning credits, for instance, cannot both be claimed using the same expenses. You may want to complete both forms to determine which results in the larger credit for your circumstances.
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Deduct credit(s). Fill in the amount of your credit on the corresponding line on the 1040 to deduct it from your tax. This will either reduce the amount you must pay or increase your refund. In a few cases, this will even earn you a refund if you did not pay any taxes.
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