Tax credits are one of the most powerful ways to lower your income taxes. A tax credit reduces your tax bill dollar for dollar. A tax deduction, on the other hand, only reduces your taxable income, so your benefit is determined by your tax bracket.
For example, a tax deduction of $1,000 will lower your tax bill by $320 if you are in the 32% tax bracket. A $1,000 tax credit will lower your tax bill by $1,000.
Here are some of the most common tax credits; most are subject to income limits.
Child credit. Taxpayers who have dependent children under age 17 may be eligible for a child tax credit of $2,000 per child.
Dependent care credit. Expenses paid for the care of dependent children under 13 and certain other dependents may qualify for a tax credit.
Education credits. Qualified college and vocational school expenses for eligible students may qualify for a credit. Under the American Opportunity Tax Credit, up to $2,500 per student can be claimed for tuition and fees paid during four years of post-secondary education. Under the Lifetime Learning Credit, up to $2,000 per family is available for post-secondary education expenses and for education expenses to acquire or improve job skills.
Earned income credit. This credit is intended for low-income taxpayers. The size of the credit depends on the amount of your earned income (wages and self-employment income), investment income, and your filing status. Qualifying children can increase the credit.
Business credits. There are a number of credits available to businesses. They include the research credit the work opportunity credit, the disabled access credit, and the low-income housing credit.
Don't overlook valuable credits that could reduce your taxes. For details on the credits for which you might qualify, call for a review of your situation.