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A Guide to Common Tax Credits
A Non-Marginal guide to tax credits. Get it? No? Well, you will shortly. The pun lies in the beauty of tax credits, as compared with their money-saving cousin, tax deductions. See, tax credits affect the bottom line (the taxes you owe), while tax deductions affect your adjusted gross income a.k.a. your AGI (how you calculate your tax obligation). So, if you are in the 35% tax bracket and are eligible for a $1,000 tax deduction, you are really only reducing your tax obligation by $350 ($1,000*35%). If, however, this were a tax credit, you would reduce your tax obligation by the full $1,000. Silly title, serious savings.
Put Your Kids to Work!
Most people don’t realize just how expensive it is to raise a child until they have one of their own. Fortunately, the IRS does and has provided a number of ways to lessen this burden -- the expenses, not the children themselves.
If your children are under the age of 17 at the end of 2008, you may qualify for a credit of $1,000 per child. The “Child Tax Credit Worksheet”, found in form 1040 and form 1040A, allows you to calculate the exact credit amount, as well as any limitations. However, like all gifts coming from the IRS, there are strings attached. Credits are generally subject to something called phase-outs, and this one is no different. Phase-outs are essentially a mechanism created by the IRS to reduce, or in some cases, eliminate credit for those people that bring home too much bacon. You can use Publication 972 to calculate the credit you’re eligible for.
Unlike adults (well, most adults), kids require supervision to keep them safe and out of trouble. Since most of us don’t have the luxury of being able to quit our jobs and watch our kids ourselves, this will usually mean dropping the kids off at daycare or hiring a nanny; both expensive solutions. Fortunately there is a tax credit for that, the Child and Dependent Care Credit.
The Child and Dependant Care Credit is subject to some limitations (surprise!) but is generally between 20 – 35% of the cost of care, up to a maximum credit of $3,000 for one child and $6,000 for two or more. You are even eligible for this credit if you only work part time. Unfortunately, this credit is only applicable to care expenses incurred while you are working, so the babysitter you hired when you went out to dinner Friday night doesn’t count.
Last but not least, if you’ve chosen to go the Brangelina route and adopt a child you may be eligible for a credit of up to $13,360. In order to qualify, the adoptee must be under the age of 18, or handicapped and unable to care for themselves and the adoption must have been finalized by year-end 2008. This credit begins to phase-out at an AGI of $185,210 and drops to $0 if you make above $225,210. Sorry Brad.
Go Green!
These days it seems that everyone is pushing for a “green” lifestyle, and the IRS is no different. The IRS grants tax credits to promote different levels of environmentally conscious behavior. Getting rid of the Hummer may not qualify you, but trading it in for a qualifying hybrid vehicle sure will! If you bought a new (used and leases don’t qualify) hybrid last year you could be eligible for a credit of up to $3,400.
If you can’t bear the thought of parting with your truck, the IRS has several other ways for you to save some green. Simple upgrades to your home’s insulation, doors, windows, etc. to improve energy efficiency will earn you a credit equal to 10% of their cost (up to $500 total for all tax years). If you are feeling a bit more gung-ho, the IRS will grant you a credit of up to 30% of the cost of installing solar panels, solar water heating systems, and fuel cell power plants. Unfortunately, if you were thinking that Uncle Sam would help bankroll your love life, you’re in for an unpleasant surprise. If either solar energy system is used, even partially, to heat a pool or hot tub you are disqualified from claiming that credit.
And the Drum Roll Please…
While the IRS makes it painfully clear that there really is no such thing as a free lunch, use of popular tax credits can net you pretty substantial tax savings this year. The extra time spent figuring out what you qualify for is well worth it. Remember, every dollar counts!
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