Tax credits are the fastest way to reduce how much you owe Uncle Sam.
They are even more valuable than deductions because credits reduce your actual tax bill dollar for dollar. For example, if you’re in the 25-percent tax bracket, a dollar of deductions is worth a quarter, but a dollar of credits is worth a dollar. So forgetting a credit hurts more than overlooking a deduction.
Here are six tax credits that could help lower your taxable income.
1. Energy-saving home improvements.
The federal government offers two tax credits that can be applied to the installation of energy-saving equipment in a home.
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The Residential Energy Efficiency Property Credit is available to homeowners who install qualified energy equipment such as hot water heaters, geothermal heat pumps, fuel cells and wind turbines. The credit is worth 30 percent of the cost including installation, with no upper limit for solar, wind and geothermal equipment. The maximum credit for fuels cells is $500 for each half-kilowatt of power capacity.
The Nonbusiness Energy Property Credit is available to homeowners who install equipment or materials that meet certain efficiency standards. This can include insulation, exterior doors, window or skylights and roofing, along with central air conditioning systems, water heaters and pumps and furnaces. Homeowners can claim a credit for 10 percent of the cost of the improvement and 100 percent of residential energy property costs. Significant limits do apply.
2. Education credits.
There are two education credits offered by the federal government that Americans often miss out on. Just two-thirds of the 18 million people in college claimed one of the higher education tax breaks, according to the 2014 H&R Block study.
The first is the American Opportunity Credit, which is worth up to $2,500. It applies to students who are enrolled at least half-time in the first four years of college. The second credit is the Lifetime Learning Credit. It’s worth up to $2,000 and applies to any higher education course or courses — including those at vocational and community college — whether they improve job skills or enhance your knowledge during retirement.
3. Earned Income Tax Credit (EITC).
Despite how valuable this credit is, a fifth of households that are eligible for the EITC don’t claim it on their tax returns. That’s a large enough number to motivate the IRS to create an EITC Awareness Day.
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The EITC credit is worth up to $6,242 for taxpayers who have three or more qualifying children and earned up to $53,267 in income. It’s also refundable, meaning you receive the credit even if it’s more than the tax on your income. For instance, if the tax on your income equals $3,000 and you have a refundable credit of $4,000, then you get a $3,000 credit toward your taxable income (reducing it to zero). Plus, you get a $1,000 refund.
4. Child care and dependent care credit.
Parents can claim this tax credit to cover expenses for child care that enabled a spouse to either work or look for a job. Up to $3,000 in expenses can be used to calculate the credit. That amount rises to $6,000 for more than one child. Children must be under 13 to be a qualifying dependent. However, any expenses paid through a dependent flexible spending account using pre-tax dollars during the year can’t be used for the credit.
Taxpayers with a spouse or other individual who can’t take care of themselves (and lives with the taxpayer) can also claim this credit.
5. Child tax credit.
You likely qualify for the child tax credit if you have dependent child under 17. This credit can be worth up to $1,000 per child and is in addition to the regular $4,000 exemption you can claim for each child.
6. Saver’s credit.
Also known as the retirement savings contributions credit, this credit is Uncle Sam’s way of rewarding low and moderate-income workers for planning for the future. The credit is worth 50 percent, 20 percent or 10 percent of the contributions you made to your IRA or employer-sponsored retirement plan, up to $2,000 (or $4,000 if filing jointly) depending on your adjusted gross income. Use this chart from the IRS to determine if you qualify.
