Be aware of the difference between credits and deductions. CPA Jearl Meeks explains "Tax credits are a dollar-for-dollar reduction in the amount of tax that you pay. Tax deductions are reductions of the taxable income that you report to calculate the tax that you pay. So tax credits are always more important than tax deductions."
If you have children the Child Tax Credit
and Dependent Care Credit
may apply either for child care expenses or for each qualifying child you claim on your return. The dependent care credit may also apply is your spouse is disabled.
Saving for retirement may lower your tax bill if you contribute to an IRA or retirement plan at work. This one is known as the Saver's Credit.
The IRS provides these details for taxpayers on all, five, credits:
1. The Earned Income Tax Credit is a refundable credit for people who work and don't earn a lot of money. The maximum credit for 2012 returns is $5,891 for workers with three or more children. Eligibility is determined based on earnings, filing status and eligible children. Workers without children may be eligible for a smaller credit. If you worked and earned less than $50,270, use the EITC Assistant tool on IRS.gov to see if you qualify. For more information, see Publication 596, Earned Income Credit.
2. The Child and Dependent Care Credit is for expenses you paid for the care of your qualifying children under age 13, or for a disabled spouse or dependent. The care must enable you to work or look for work. For more information, see Publication 503, Child and Dependent Care Expenses.
3. The Child Tax Credit may apply to you if you have a qualifying child under age 17. The credit may help reduce your federal income tax by up to $1,000 for each qualifying child you claim on your return. You may be required to file the new Schedule 8812, Child Tax Credit, with your tax return to claim the credit. See Publication 972, Child Tax Credit, for more information.
4. The Retirement Savings Contributions Credit (Saver's Credit) helps low-to-moderate income workers save for retirement. You may qualify if your income is below a certain limit and you contribute to an IRA or a retirement plan at work. The credit is in addition to any other tax savings that apply to retirement plans. For more information, see Publication 590, Individual Retirement Arrangements (IRAs).
5. The American Opportunity Tax Credit helps offset some of the costs that you pay for higher education. The AOTC applies to the first four years of post-secondary education. The maximum credit is $2,500 per eligible student. Forty percent of the credit, up to $1,000, is refundable. You must file Form 8863, Education Credits, to claim it if you qualify. For more information, see Publication 970, Tax Benefits for Education.
Make sure you qualify before claiming any tax credit. You can always visit IRS.gov
to learn about the rules. The free IRS publications mentioned are also available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).
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