Which Tax Credits Can You Take Advantage Of?
Tax credits are the most powerful way to reduce your tax liability --- these credits lower the amount of tax you owe on a dollar for dollar basis. After you determine your tax liability, any tax credits that you qualify for will subtract from the total amount you owe the Internal Revenue Service. While tax credits are more powerful than tax deductions, there may only be a few credits that you are eligible to claim on your tax return.
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Earned Income Credit
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You might be eligible for the earned income tax credit. With this credit, you have to make a small amount of annual income to qualify. If you make less than $40,000 per year, you may qualify for this particular credit. You have to have a valid Social Security number and you cannot file your taxes as married, filing separately. You also cannot have more than a certain amount of investment income for the year.
Child Credit
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If you are a parent with children living at home, you may be able to take advantage of a child tax credit. For each child, you can reduce your tax liability by up to $1,000 (as of January 2011). With this particular credit, the children must be under the age of 17 to qualify. If your income is high, you may only be able to take a partial credit. You can also get a credit if you pay for child care.
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Education
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Those who pay for college expenses can also benefit from tax credits, such as the Hope Learning Credit. With this particular credit, you can get a credit for up to $1,100 for tuition and other education expenses for yourself or a dependent. The Lifetime Learning Credit gives you a tax discount of up to 20 percent of the first $10,000 you spend --- $2,000 is the most you can get from this option.
Retirement Savings
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Contributing to a retirement account allows you to save money on taxes as it reduces your taxable income. You can also defer taxes on the investment returns of your account. If your income is low enough, you may also qualify for a tax credit for putting money into your retirement account. The retirement saver's tax credit can give you a tax discount between 10 and 50 percent of your annual contribution.
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