How to Find Income Tax Credits You May Not Know About
The IRS is fickle when it comes to your income tax. Sometimes, they let you reduce your taxable income, sometimes they give you tax credit to eliminate your tax liability but that's all they will give. Sometimes, they give you a tax credit that you can take to the bank and cash! How do you sort through this mess?
There are two ways to reduce your tax liability. Deductions reduce your adjusted gross income so that your taxable income is reduced. Credits reduce your tax liability itself. Some credits may eliminate your tax liability altogether but are not "refundable." This means that you cannot receive a tax refund for any amount above your tax liability. For example, if you have a Lifelong Learning Credit of $1,500.00 but only have a $700.00 tax liability, you will not owe tax since the credit will eliminate the tax liability but you will not receive a refund of $800.00. However, some credits are refundable such as the Earned Income Credit. You will receive a refund for any amount you are entitled to above the amount of the tax liability it eliminates.
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Instructions
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What are tax credits that you may be eligible for? Learn about the different tax credits you may be eligible for by getting Publication 17. You can go to your local IRS office or view it online on the IRS website. It is a comprehensive guide to all things income tax related.
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A little known tax credit is the sales tax credit. You must itemize your deductions to gain this credit. Because some states do not impose a sales tax, people in states that do have sales tax can take advantage of a sales tax credit.
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Another little known tax deduction is for educators who often have out-of-pocket expenses that they do not get reimbursed for. They may receive up to a $250.00 tax deduction. Please note - there are specific eligibility requirements for this deduction. There is also an energy efficiency tax credit are available to homeowners who have made energy efficiency improvements to their homes. You may be eligible for an adoption tax credit if you adopted a child and have qualifying expenses associate with the adoption.
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Tips & Warnings
Determine if an expense is deductible. For many people, the standard deduction amount is higher than the deduction amount they would receive if they itemize their deductions. If you have started a home based business - doing ehow articles and getting some good exposure and payments, this is taxable income. But there are deductions associated with this income that you may claim to reduce your tax liability! If you have a dedicated office in your home, you can even deduct a portion of your home expenses and utilities. Consult with your tax professional.
Being aware of potential tax credits can better prepare you for filing your tax return and may help you reduce or eliminate your tax liability. And just maybe, get you one of those refundable credits!
Consult a tax professional for specific tax advice.
