What Is a Tax Credit? It Lowers Your Tax Bill!

Alden Wicker
Posted

Hey there, this story refers to the 2011 tax year. For the most up-to-date information covering the 2012 tax year, check out Don’t Miss Any of These Money Saving Tax Credits.

Want to pay less in taxes?

Unless you’re Warren Buffet, the answer is probably, “Yes!”

There are several ways to (legally) pay less in taxes. There are deductions, exemptions, and—what we’ll talk about in this post—credits.

Unlike deductions and exemptions, which lower the amount of income you are taxed on, credits directly reduce the amount of taxes you owe. So if you receive a $1,000 credit, that means you will pay $1,000 less in taxes. Sweet and simple, right?

Read on to find out if you can claim any of the most commonly claimed credits.

RELATED: What Is the Alternative Minimum Tax (AMT)?

If You Have a Low Income …

You could claim the Earned Income Credit. This credit, worth between $464 and $5,751, applies to people whose earned income and Adjusted Gross Income (which we show you how to find here) fall below a certain threshold. Unlike most credits, the EIC is refundable. That means when the value of the EIC tax credit you qualify for exceeds the amount of taxes you owe, you get a refund. Look at the chart below to see which category applies to you. If your income is less than the number listed, you may qualify.

SingleMarried Filing Jointly
3+ Children$43,998$49,078
2 Children$40,964$46,044
1 Child$36,052$41,132
No Children$13,660$18,740

If you plan to claim this credit, you will need all the information listed here, such as last year’s federal and state income tax statements, all your income statements for the current filing year and information on caretakers of any dependent children.

If You Made Energy-Efficiency Improvements to Your Home …

If you lowered your energy bills by sealing up your home, you get even more money from the IRS! The Nonbusiness Energy Property Credit is for homeowners who made energy-efficient improvements such as insulation, new windows and furnaces. For 2011, you can get  a credit worth 10% of the cost of the qualified efficiency improvements you made. You can claim up to $500 over your lifetime.

woman sitting in car an look to wind turbineWhat if your electricity comes from your own green sources? You should check out the Residential Energy Efficient Property Credit. This credit gives homeowners 30% of what they spend on qualifying property such as solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines, and fuel cell property. No cap exists on the amount of credit, except for fuel cell property.

If in this coming year you decide you want to go green for your home, the IRS suggests that you check with the manufacture’s tax credit certification before you purchase. This can normally be found on the packaging or the company’s website. Full details are available on Form 5695.

If You Bought a Plug-In Electric Car …

You could claim the Plug-In Electric Vehicle Credit of up to $7,500. You qualify if you purchased a plug-in electric vehicle or conversion kit in 2011 and meet the very specific requirements for what kinds of cars (and two-wheeled vehicles) qualify. Read more on the IRS website.

If You, Your Spouse or a Dependent Is a Student or Taking Classes …

You could claim either the American Opportunity Credit or the Lifetime Learning Credit.

Education credits are claimed on the IRS form 8863. It’s important to note that you cannot claim the Lifetime Learning Credit and the American Opportunity Credit for the same student, even if he/she qualifies for both. You can mix and match your credits if you are paying for more than one student, choosing one credit for one, another credit for the other, and then switch the next year. But no double crediting in the same year! We suggest taking the American Opportunity credit if you are eligible for both, because you can claim more expenses and the credit can go up to $500 higher. Publication 970 will give you the nitty gritty of what we summarize below.

If You, Your Spouse or a Dependent Is a Full-Time Student …

You could take the American Opportunity Credit, which is a modification of what used to be called the Hope credit. It allows you to take up to $2,500 off your taxes if the student is working toward a degree or other educational accreditation. The American Opportunity Credit is a big improvement on the Hope credit because it:

  • Makes the benefit available to more Americans, like those with higher incomes and those who pay no tax
  • Allows you to add required course materials to the list of qualifying expenses
  • Allows you to claim four years of post-secondary education (graduate school) instead of just two

You can claim this credit if:

  • You are an individual with an AGI of $90,000 or less, or
  • You’re part of a married couple filing jointly with an AGI of $180,000 or less

Even if you don’t pay taxes at all, you can get up to $1,000 refunded to you by taking this credit. You can learn more about the American Opportunity Credit on the IRS website.

If You, Your Spouse or a Dependent Is Taking Continuing Education Classes …

You could take the Lifetime Learning Credit, which is up to $2,000 for post-secondary education expenses. You should take this if you are taking post-secondary classes, but you’re just taking a class or two, or not working toward a degree.

There is no limit on the number of years the Lifetime Learning Credit can be claimed. In order to get this credit, you must either:

  • Pay qualified tuition expenses
  • Pay the education expenses for an eligible student (yourself, spouse or a dependent for whom you claim an exemption on your tax return)

You can claim this credit if:

  • You are an individual with an AGI of $60,000 or less, or
  • You’re part of a married couple filing jointly with an AGI of $120,000 or less

If You Have a Child or Children Under Age 17 …

You could claim the Child Tax Credit, which can reduce your taxes by up to $1,000 per child. If the amount of your Child Tax Credit is greater than the amount of income tax you owe, you may be able to claim the Additional Child Tax Credit, which will refund you the difference even if you don’t pay any taxes. In order to claim the Child Tax Credit, you must answer yes to all of these questions:

  • Was he/she 16 years old or younger as of December 31st, 2011?
  • Is he/she your son, daughter, foster child, stepchild, brother, sister, stepbrother, stepsister or child of any of those people (like your grandchild, niece or nephew)? An adopted child is considered your child.
  • Did you claim him/her as a dependent on your tax return?
  • Is he/she a U.S. citizen, U.S. national or U.S. resident alien?
  • Did he/she live with you for more than half of 2011? There are some exceptions to the residence test, which can be found in IRS Publication 972, Child Tax Credit.
  • Was your AGI less than $75,000 if you’re an individual, less than $55,000 if you’re married filing separately or less than $110,000 if you’re married filing jointly?

If the answer to all of these questions is yes, then you can take the Child Tax Credit.

If You Had a Caretaker for Your Child or Dependent …

You could claim the Child and Dependent Care Credit. You can claim this credit if you paid someone to care for your child under 13, spouse or dependent who was physically or mentally incapable of caring for themselves. You’ll have to provide the taxpayer ID of the care provider. You can take the credit if:

  • You’re filing jointly with your spouse.
  • You (and your spouse if you’re married) were either looking for work, earning an income or a full-time student for five or more months of the year.
  • The dependent for which you paid for care lived with you for more than half the year.

You cannot take the credit if:

  • The care provider was someone you or your spouse can claim as a dependent.
  • The payment for the care was made to your spouse of the parent of the child.

For complete information on this credit please see IRS Publication 503.

More on Taxes From LearnVest

The tax credits you take depend on your filing status. Find out what yours is.
Here’s everything you need to know about taxes if you’re married.
Exemptions are another way to lower your tax bill. Which ones can you take?