Done with reducing your taxable income? Now reduce your tax liability through various credits. Deductions and adjustments reduce your taxable income, indirectly cutting down your tax. While credits can directly curtail tax to the extent of being nil or even negative (refund).
There are two basic types of credits: Refundable and Non-Refundable Credits. The fundamental difference is that refundable can reduce the tax to the extent of being negative and thus providing a refund to the taxpayer, whereas Non-refundable credits can reduce your tax only to negative. With non-refundable tax credits you cannot receive a refund.
The various tax credits are:
1. Foreign Tax Credit: Taxes paid on passive income to other countries can fetch you a credit in your federal return. Some incomes of foreign source are excluded from being eligible for the foreign tax credit.
2. Child and dependent care credit: The expenses incurred by you for a dependent or a child, while you are working, are included in Child and dependent care credit. The expenses can be related to household services or educational support. It is non-refundable credit.
3. Education Credits: These credits are available for working students who incur out of pocket tuition expenses. The two common Education credits are American Opportunity credit and Lifetime Learning credit.
4. Retirement savings contribution credit: Contributions made to retirement savings plan are subject being credits in your income tax return. The qualified plans are IRA, SEP, SIMPLE, 401k, 501(c) or sec 403(b).
5. Child tax credit: This credit is available to taxpayers who have children who can be claimed as dependents. The IRS decided on a fixed amount that can be claimed as a credit per child.
6. Residential energy credit: This credit is available to people who buy things that can save energy. Nearly, 30% of your purchases can be claimed as credit. Purchase of solar panels, bio-energy equipments and geo thermal equipments is included in residential energy credit.
7. Adoption credit: The out of pocket expenses incurred by a taxpayer who has adopted a child during the assessment year can be considered as credit to reduce the tax liability. There is a limit to the available credit which is updated every year. If your expenses for adopting a special needs child go beyond the limit set by IRS, you can take full credit of the expenses.
8. Credit for the Elderly and Disabled: This credit is available for the taxpayers who are more than 65 years of age or who are disabled.
Credits can be very useful tool to get refund from the IRS or at least to minimize your taxes. One should keep records of all the credit related expenditures. You not just spend money but also get credit for doing it.
