Claiming the standard deduction is so simple that IRS estimates 25% of the individuals who should itemize leave money on the table by claiming the standard deduction. Last year, in "Cashing in On Overlooked Deductions" I highlighted some deductions. Deductions though, whether standard or itemized, only reduce your amount of taxable income. Credits however are figured AFTER your tax liability and therefore, reduce your tax bill dollar for dollar. Credits are not only good, they are better than deductions and there are a lot of them.
There are two types of credits: nonrefundable credits reduce any taxes you owe until you have no tax due, but any remaining credit is generally lost. For example, if you have a Child Tax Credit of $1000 and your tax liability is only $500 you only use $500 of the Child Tax Credit and you owe no taxes. A refundable credit; however, is not limited by your tax due and can mean that you get more money back than the taxes you paid during the year -- it's like the IRS giving you money. For example, the $500 of unused Child Tax Credit in the previous example can qualify as $500 in Additional Child Tax Credit, which the taxpayer can get back as a refund. You must file a tax return to get any refundable credit you qualify for.
Here are five credits that can reduce your tax bill, could possibly eliminate it altogether and maybe even give you a bigger tax refund:
Saver's Credit - this nonrefundable credit, which is formally the Retirement Savings Contribution Credit, is an incentive to help workers who are saving for retirement. The credit is based on a percentage of up to $2,000 in retirement plan contributions, such as 401(k) or IRA plans, made by each individual during the year. The credit is designed for low- and moderate-income folks who have an adjusted gross income of less than $30,000 ($45,000 if head of household; $60,000 if married filing jointly). Of course, the percentage is based on gross income and filing status so the amount of the credit could be as low as $200, or as high as $1,000, on that $2,000 contribution.
American Opportunity Tax Credit (AOTC) - a combination credit of up to $2,500 for tuition and required enrollment fees, including certain course materials, for the first four years of post-secondary education. Your modified adjusted gross income (MAGI) must be under $90,000 ($180,000 for joint filers) and you must not have claimed the AOTC or the former Hope Credit for more than four tax years for the same eligible student. The combination credit function allows forty percent of this credit to be refundable.
Child and Dependent Care Expenses - a nonrefundable credit for the costs of care for your child under 13 or a dependent or spouse who is incapable of caring for themselves while you are working or looking for work. The credit is based on $3,000 spent with one individual or a total of $6,000 paid for more than one individual. The amount of your credit is between 20 and 35 percent of your allowable expenses; the percentage depends on your adjusted gross income.
Child Tax Credit - a nonrefundable tax credit of up to $1,000 per qualifying child. If you do not qualify for the full amount, you may also be able to claim the refundable Additional Child Tax Credit. You must have earned income and meet various criteria regarding the qualifying child.
Earned Income Tax Credit (EITC) - is a refundable credit for working people who earn a low to moderate income. Even if you do not owe any tax or are not required to file, you must file a tax return and meet certain other qualifications to qualify for the credit.
Using any version of simple and taxes in the same sentence is actually a bit of a misnomer. Though you may not need to be a genius to prepare and file your taxes, knowing about all the deductions and credits you're entitled to can certainly save you money. Even if you are using a tax pro, you have to work together on your tax return since only you can provide all the information, data, forms, and experiences to get all the benefits you deserve. If a credit, deduction, or other benefit is left off your tax return, the money it may save you will not find its way back to you automatically.
To help you find all the tax credits and deductions you might be eligible for, check out Tax Tips on JacksonHewitt.com or the IRS resource Credits & Deductions for Individuals. Once you have all the information you can file your return and get a bigger and better tax refund -- it is, after all, your money -- get all of it.