For smart taxpayers, a tax credit is a welcome solution to easing some of the burden of the federal tax. Whether it’s a credit for a business-related expense, childcare expenses, moving expenses or attending school, a tax credit can leave you with more money at the end of the fiscal year.
A tax credit is a purchase or item that reduces the amount of your actual tax that must be paid to the federal government. It is different (and often more valuable) than a tax deduction. A tax deduction merely reduces your taxable income and, therefore, is subject to the changes in the tax rate. A tax credit, meanwhile, is not dependent on the tax rate and is worth the same to each taxpayer no matter what their income.
In the U.S., most tax credits are included with items that have a larger impact on society. There are tax credits for converting your home to solar power, for buying a fuel-efficient car or for returning to school. Other tax credits help those with a low income make the most of their earnings. There is the Earned Income Tax Credit for low-income workers that lets them keep more of their earnings. There are also tax credits for those who use daycare and childcare facilities to aid them in returning to work.
Below are some of the most common federal tax credits.
Energy tax credit
Homeowners who make improvements to their property with materials and equipment that is energy efficient may qualify for an energy tax credit from the federal government. For instance, the federal government currently allows a tax credit for the purchase of an energy efficient water heater, furnace or air conditioner. In addition, upgrading your windows and doors with energy efficient materials also may qualify for the tax credit. The credit is usually about 30 percent of the price of the item, up to $1,500 (the limit set in 2009 and 2010). For instance, if you purchased an air conditioner for $5,000 in 2009, you would receive the maximum federal tax credit of $1,500 (30 percent of the price) on your 2009 tax return.
Restrictions stipulate that improvement must be made to existing homes (or mobile homes or condos) rather than newly constructed dwellings or rentals.
Childcare
Because childcare can be an important and necessary expense for many families, the federal tax credit for this expense can be important. The federal tax credit for childcare is usually equal to a percentage of the cost of childcare minus any reimbursements you may have received from any social service programs. The tax credit is based on your income. If you income is less than $15,000, your tax credit will begin at 35 percent of the expenses; if your adjusted gross income is $43,000 or more, your tax credit tops out at 20 percent of expenses. The maximum tax credit is $3,000 for one child and $6,000 for two or more. The childcare center you utilize must meet federal standards and have a total enrollment of six children or more.
Education
There are two federal tax credit programs that permit students to recoup the cost of attending school: The Lifetime Learning Credit and the Hope (or American Opportunity) Credit. The Lifetime Learning Credit gives you a federal tax credit of up to $2,000 or $4,000 for students in disaster areas to attend an eligible institution. The benefit of a Lifetime Learning Credit is that there is no limit to the number of years you can receive a tax credit and there is no requirement to pursue a degree. The Hope Credit (or American Opportunity Credit provides a maximum of $2,500 in federal tax credit and has recently been modified to make it eligible for students at four-year post-secondary institutions, rather than only two years as in the past. To receive the full credit, students must have an adjusted gross income of $80,000 or less or $160,000 or less for married couples that file jointly.
First-time homebuyer
One of the most popular of all the tax credits, the first-time homebuyer tax credit had recently been expanded to include $8,000 for homes constructed after December 31, 2008 and before May 1, 2010. And users of this tax credit have the added benefit of not being required to repay the credit (unless the owner sells the home within three years). The tax credit is limited to $75,000 for single owners and $150,000 for married couples. A reduced tax credit of $6,500 is offered to homeowners who have lived for in their homes for at least five straight years before moving into a new home. To receive the tax credit, the home must be bought after November 6, 2009.
They are many more federal tax credits available to qualified purchasers that can not only result in much-needed additions to their homes and lives, but be a big advantage to their bottom line come tax time.