The end of the 2007 tax year is almost upon us. Now is the time to take advantage of a few often overlooked tax credits to put some extra cash in your pocket. The most important thing to note is that a credit is different than a deduction in that the a credit directly reduces the tax which is owed while a deduction reduces the amount of income which is subject to taxes. For example, a Child Tax Credit of $1,000 directly reduces the tax due by $1,000 where as a $1,000 tax deduction would only be $1,000 * tax rate (generally from 10%-35%).
My List of [Little Known] Tax Credits:
- Adoption Tax Credit
- Child and Dependent Care Tax Credit
- Child Tax Credit
- Earned Income Tax Credit
- Foreign Tax Credit
- Credit for the Elderly and Disabled
- Hope Tax Credit
- Lifetime Learning Tax Credit
- Mortgage Interest Tax Credit
The Adoption Tax Credit is used to offset to the costs associated with the adoption of a child under the age of 18 or a person who is physical or mentally unable to care for themselves. This tax credit can be used for the reasonable and necessary fees, legal expenses, and other expenses directly related to the adoption. The credit can only be claimed in the year that an adoption is finalized (and only if the adoption is finalized). The credit amount is up to $10,960. In addition to the credit, and exemption of $10,960 for employer provided adoption assistance is also available. It is important to note that the same expenses can not be claimed for both the credit and employer assistance exemption. For further information refer to IRS Publication 968.
The Child and Dependent Care Tax Credit applies to the money spent to pay for care of a child or disabled dependent or spouse in order for the guardian to work or look for work. In order to be eligible the person paid to provide childcare can not be another dependent or a family member. The amount of expenses which can be claimed is up to $3,000 for one dependent or up to $6,000 for more than one dependent. The amount of the final credit decreases from 35% to 20% of claimed expenses as the adjusted gross income (AGI) of the filer increases from $15,000 to $43,000. For all AGI over $43,000 with $6,000 of claimed child care expenses the total credit amount would be $1,200. For further information refer to IRS Publication 503.
The Child Tax Credit is a fixed credit for each dependent child. The amount of the credit is $1,000 and decreases by $50 for each $1,000 of income over $110,000 for joint filers, $75,000 for single or head of household filers, and $55,000 for married filing separate returns. For a family of four with a AGI of $120,000 the total credit would be $1,500; $2,000 credit reduced by ($120,000 - $110,000)/$1,000 * 50, which is $500. For further information refer to IRS Publication 972.
The Earned Income Credit is a special tax credit for low income workers. The earned income credit is able to be refunded so in some circumstances even if a worker has no tax liability a refund may be due. The credit can be claimed by filers with children if their income is less than $34,001 if you have one dependent and $38,384 if you have two or more dependents. The credit can be claimed by filers without children if their income is less than $14,120 and the filer is between the ages of 25 and 65. You are not eligible for the earned income credit if you have non-qualified (interest, dividends, and other non-work related income) of more than $2,800. For further information refer to IRS Publication 596.
The Foreign Tax Credit is a reimbursement for foreign taxes paid to prevent double taxation of income from a foreign source which is subject to taxation by the United States and a foreign country. To claim the credit you must itemize you deductions and complete Form 1116 to calculate the amount of the credit. The credit is the lesser of the foreign tax paid or the equivalent amount of tax which would be paid if it were domestic income. Some restrictions and exemptions apply so be sure to carefully understand the eligibility rules. For more information refer to IRS Publication 514.
The Credit for the Elderly and Disabled is a credit for low income persons over the age of 65 and those identified as permanently disabled. The credit is 15% of the base amount. The base amount for each type of filer differs but the general amount of the credit is between $750 and $1125. To be eligible for the credit the AGI for single filers must be less than $17,500, for joint filers where only one spouse is eligible less than $20,000, for joint filers where both spouses are eligible less than $25,000, and for married persons filing separately $12,500. For more information refer to IRS Publication 603.
The Home Tax Credit is a reimbursement for the expenses incurred during the first two years spent pursuing a college degree. Qualified education expenses for the taxpayer, a spouse, or dependent can be claimed. A filer is eligible if their AGI is less than $55,000 for a single filer or $110,000 for joint filers. The amount of the credit decreases for AGI greater than $45,000 for single filers or $90,000 for joint filers. The amount of the credit is 100% of the first $1,100 in qualified expenses and 50% of the second $1,100. The total amount of the credit is $1,650 and it can be claimed only two years for any recipient. For more information refer to IRS Publication 970.
The Lifetime Learning Credit reimburses a tax filer for the expense incurred for education and job skill training for them self, a spouse, or a dependent. The credit is 20% of the claimed expenses up to $10,000 per year for a total credit of $2,000 per person per year. The credit phases out as AGI increases from $90,000 to $110,000 for joint filers or $45,000 to $55,000 for single filers. For more information refer to IRS Publication 970.
The Mortgage Interest Tax Credit is a special credit which can be claimed if a local or state government issued the taxpayer a mortgage interest tax certificate. A certificate is required to claim this tax credit. The amount is based on the amount of mortgage interest paid multiplied by the amount of the certificate. For more information refer to IRS Publication 936.
These tax credits can drastically reduce the amount of tax that is owed to the IRS. Make sure you consider each one when you prepare your taxes this year.
|