The Internal Revenue Service (IRS) has many tax credits available to taxpayers. Federal tax credits include the Earned Income Tax Credit, the Child and Dependent Care Credit, the Adoption Credit and the Retirement Savings Contribution Credit. There are two categories of tax credits; refundable and nonrefundable. Refundable tax credits reduce the amount of tax owed to the IRS and increase the amount of a refund. Nonrefundable tax credits only reduce the amount of tax owed to the IRS and are not refundable. Some credits can be carried over to subsequent tax years. Although most taxpayers can claim a tax credit on their tax return, all credits have income limits.
Earned Income Tax Credit
The Earned Income Tax Credit (EITC) is a refundable tax credit that increases the amount of a taxpayer's refund or reduces the amount of tax owed to the IRS. As of the 2010 tax year, the maximum amount a taxpayer can receive from the EITC is $5,666. To qualify for the EITC you must have earned income, have less than $3,100 in investment income, have a valid Social Security number and have a filing status other than married, filing separately. In addition, the EITC does have age limits. If you do not have children, you must be over age 25 but under 65 at the end of the year. The EITC also has income limits. The income limit for a taxpayer with three or more children is $43,352 ($48,362 married filing jointly), $40,363 ($45,373 married filing jointly) for two children, $35,535 ($40,575 married filing jointly) for one child and $13,460 ($18,470 married filing jointly) for no children. You can use the table on the Form 1040 instructions (See Resources) to determine the amount of credit you will receive.
Child and Dependent Care Credit
The Child and Dependent Care Credit is a nonrefundable tax credit that reduces the amount of income tax owed to the IRS. The amount of the Child and Dependent Care Credit allowed is limited to the amount of your earned income. The credit is then determined according to a percentage. For instance, if you have $10,000 of earned income for the tax year, the maximum amount of benefits you can claim is $10,000. The maximum amount of credit is then multiplied by a percentage. If your income is over $0 but less than $15,000, your credit is 35 percent of the total amount paid. If you have $10,000 of earned income and paid $5,000 for child and dependent care, your credit is $1,750. You can use the table on IRS Publication 503 (see Resources) to determine the amount of credit you will receive.
The Adoption Credit is a refundable tax credit that increases the amount of your refund or reduces the amount of tax owed to the IRS. The Adoption Credit is available to cover the amount of qualified out-of pocket adoption expenses and has a maximum credit of $13,170. Qualified adoption expenses include adoption fees, attorney fees, court costs and travel expenses. The credit is calculated according to your modified adjusted gross income and has an income limit of $222,180 as of 2011. The maximum amount of credit is allowed until the taxpayer's modified adjusted gross income reaches $182,520. The credit begins to phase out until it is eliminated at $222,520. If you have more than $13,170 in adoption expenses, the remaining amount can be carried forward to subsequent income tax returns. To claim the credit, you must complete IRS Form 8839 and attach it to your income tax return.
Retirement Savings Contribution Credit
The Retirement Savings Contribution Credit is a nonrefundable tax credit that reduces the amount of tax owed to the IRS. If you make contributions to certain retirement plans or individual retirement arrangements, you may qualify for the Retirement Savings Contribution Credit. The credit does have income limitations. Your adjusted gross income must be below $27,750 if filing single, $41,625 if filing head of household and $55,500 if filing married filing jointly to claim the credit. The maximum amount of credit allowed is 50 percent of the first $2,000 of contributions. To determine the amount of tax credit you can claim on your income tax return, complete Form 8880 and attach it to your income tax return.