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By Victor Omelczenko
Whether you’re looking to lower your tax bill or increase your refund, these IRS tips can help your bottom line. Tax credits can help pay the cost of raising a family, going to college, saving for retirement or getting day care for dependents. But each year, many taxpayers overlook these credits, even though they often qualify for one or more. While tax deductions and tax credits can both save money, they are fundamentally different. A deduction lowers the income on which the tax is figured, while a credit lowers the tax itself. The popular credits listed below can help either lower a taxpayer’s bill or increase a refund.
Earned Income Tax Credit
The Earned Income Tax Credit (EITC) helps people who work but do not earn a lot. Working families with incomes below $41,646 and childless workers with incomes under $15,880 often qualify. Generally, you must have earned income as an employee, independent contractor, farmer or business owner to qualify. Taxpayers under the minimum retirement age who receive disability payments from an employer plan may also be eligible. The EITC Assistant, available in mid-January, can help you see if you qualify.
Child Tax Credit
A taxpayer who has a dependent child under age 17 probably qualifies for the child tax credit. This credit, which can be as much as $1,000 per eligible child, is in addition to the regular $3,500 exemption claimed for each dependent. A change in the way the credit is figured means more low- and moderate-income families will qualify for the full credit on their 2008 returns. The child tax credit is not the same as the child-care credit.
Credit for Child and Dependent Care Expenses
An individual who pays for someone to care for a child so he or she can work or look for work probably qualifies for the child- and dependent-care credit. Normally, the child must be the taxpayer’s dependent and under age 13. Although often referred to as the child-care credit, this credit is also available to those who pay someone to care for a spouse or dependent, regardless of age, who is unable to care for him- or herself. In most cases, the care provider’s Social Security number or taxpayer identification number must be obtained and entered on the return.
Form 1040 filers claim the credit for child and dependent care expenses on Form 2441. Form 1040A filers claim it on Schedule 2.
The Hope credit and the lifetime learning credit help parents and students pay for post-secondary education. Normally, a taxpayer can claim both his or her own tuition and required enrollment fees, as well as those for a dependent’s college education. The Hope credit targets the first two years of post-secondary education, and an eligible student must be enrolled at least half time. A taxpayer can also choose the lifetime learning credit, even if only taking one course. In some cases, however, he or she may do better by claiming the tuition and fees deduction, instead.
The education credit and the tuition and fees deduction cannot both be claimed for the same student in the same year. Special rules, including income limits, apply to each of these tax breaks.
Education credits are claimed on Form 8863.
Saver’s CreditThe saver’s credit is designed to help low- and moderate-income workers save for retirement. A taxpayer probably qualifies if his income is below certain limits and he contributes to an IRA or workplace retirement plan, such as a 401(k). Income limits for 2007 are:
Also known as the retirement savings contributions credit, the saver’s credit is available in addition to any other tax savings that apply. There is still time to put money into an IRA and get the saver’s credit on a 2008 return. 2008 IRA contributions can be made until April 15. Form 8880 is used to claim the saver’s credit.
Other Credits Available
Credits Save Taxpayers Money
These credits can increase a refund or reduce a tax bill. Usually, credits can only lower a tax liability to zero. But some credits, such as the EITC, the child tax credit, the Recovery Rebate Credit and the first-time homebuyer credit, are refundable — in other words, they can make the difference between a balance due and a refund.
Although some credits are available to people at all income levels, others have income restrictions. These include the EITC, the Recovery Rebate Credit, the saver’s credit, the first-time homebuyer credit, the education credits and the child tax credit.A taxpayer who qualifies can claim any credit, regardless of whether he or she itemizes deductions. Any credit can be claimed on Form 1040, sometimes referred to as “the long form.” Alternatively, many credits can also be claimed on the 1040A “short form.” The EITC and Recovery Rebate Credit can even be claimed on Form 1040EZ. The instruction booklet for each of these forms contains information about these and other tax credits.
Victor Omelczenko is an Internal Revenue Service media relations specialist.