Common Tax Credits You Might Be Eligible To Claim

By Richard Chapo

The trick to minimizing your tax pain is to reduce your gross income as much as possible. Tax credits are one of the more powerful tools for doing this.

When compared head to head, a tax credit is often far more valuable than a tax deduction. Why? Well a tax credit is a dollar for dollar reduction of the amount you owe the IRS. A tax deduction, on the other hand, is only a reduction of your gross revenues before you figure out the tax you owe using the relevant tax tables. An example often helps show this difference.

Assume you made $50,000 last year. You would try to reduce this number by claiming as many legitimate tax deducts as possible. Such deductions might include mortgage interest paid and so on. Let’s assume you were able to cut your gross down to $25,000. You would then go to the tax tables and find the amount you owed given your filing status. Let’s assume you owed $7,000. If you are able to claim any tax credits, you would now do so. Let’s say you could claim $3,000 in tax credits. You would subtract this amount from the tax you owe and end up paying $4,000 instead of $7,000. Not bad, eh? So, what are some common tax credits?

1. Education Tax Credits – The Hope and Lifetime Learning Credits are two different programs. The Hope is related to the payment of tuition for you, a spouse or dependent to go to college. It can be claimed for the first two years of college at an amount up to $1,650. The Lifetime Learning credit is similar and can be used to claim up to a $2,000 tax credit. Make sure to check the guidelines for each credit.
2. Adoption Tax Credit – Adoption is costly, but you can claim a huge tax credit of up to $10,690 in 2006. The eligibility rules, however, are complex so make sure to sit down with a quality tax prepare before claiming the credit. There is also a cap of $164,410 on total income you can earn if you hope to claim the credit.
3. Going Green – The government is trying to motivate people to uses more energy efficient cars and materials in your house. There are a bevy of credits available for everything from buying a hybrid vehicle to energy efficient windows to solar panels and so on. If you went green this year, make sure to check out your specific area with a CPA.
4. Retirement Savings Tax Credit – If you think people are nervous about the viability of social security in the long run, you should see the government. It is now offering a tax credit for anyone who earns less than $25,000 as a single filer or $50,000 as a joint filing and puts money in a retirement credit. In short, a double win for you. The tax credit can be as much as $1,000 depending on your filing status.

If you do not qualify for any of these common tax credits, do not worry. There are plenty of others out there that you might be able to claim. Even two tax credits can save you bundles on the tax you pay, so make sure you investigate the possibilities.