Questions About Tax Credits
When you file your tax return, you can claim tax deductions and credits on your form. Credits help directly lower your tax burden and are aimed at certain groups of people, such as students, parents and low-income families.
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What Is a Tax Credit?
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A tax credit is different from a tax deduction. Whereas a deduction reduces the amount of taxable income you have, a tax credit is a sum that you are allowed to deduct from the amount of tax you owe the IRS. A tax credit allows you to keep the amount of the benefits as a tax-free income. The IRS might grant you a tax credit against income tax, property tax and other taxes. Tax credits are generally used as an incentive for people to adopt a specific behavior.
What Is the Earned Income Tax Credit?
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The Earned Income Tax Credit (EITC) is a credit for people who have low income. Since a tax credit is taken out of the amount you owe to the federal government, it actually leaves you with more money for your expenses, and for this reason, it is given as a help for people with low income. You might also receive a tax refund through the EITC.
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Can I Claim the EITC?
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To claim the EITC, you must have a valid Social Security number. You also are required to have a job that provides you with income, and when you file your tax return, you must either file married jointly or as an individual. You are also required to be a U.S. citizen or be married to one and filing jointly. As of 2011, your income cannot be higher than $43,998 (or $49,078 if married filing jointly) if you have three or more children, higher than $40,964 (or $46,044 if married filing jointly) if you have two children, higher than $36,052 (or $41,132 if married filing jointly) if you have one child or higher than $13,660 (or $18,740 if married filing jointly) if you do not have children.
What is the Foreign Tax Credit?
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The foreign tax credit is an amount of money you can take out of your income that has the intention of reducing the double tax that arises when your income is taxed by the U.S. government and a foreign country in which you produced the income. You have to meet four requirements to be able to claim a foreign tax credit. The tax must have been levied on your person, you must have paid the tax, the tax must be considered legal and a real foreign liability and the foreign tax and U.S. tax for which you receive credit must both be income tax.
What Other Types of Tax Credits Are Avaible?
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You can also claim a tax credit for energy-saving products you install in your home, such as solar panels, solar water heaters and insulation systems. If you bought a house for the first time in 2009 or the first four months of 2010, you can also claim a tax credit for 10 percent of the cost of your house (up to $8,000). If you have education costs, you can also claim tax credits on these costs through the American Opportunity Credit and the Lifetime Learning Credit.
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