One of the shining moments within the tedious process of filing a tax return is being able to claim some tax credits. As you may know, obtaining a credit is almost just as good as receiving free money because it is used to decrease your tax liability or increase your refund.
While there are many credits out there, there are a few very common ones that taxpayers often forget to claim. Let’s take a look at the top tax credits people forget to claim on their tax returns.
The Earned Income Tax Credit (EITC) is a refundable credit for low-to-moderate income working individuals and families. There is a configuration process (based on the number of children you claim and your income) to determine whether you qualify for the credit – and how much you will earn in credits if you do qualify. But ultimately, the rule of thumb for this credit is if your EITC exceeds the amount of taxes owed, you will receive a tax refund.
If you contribute to your 401(k), IRA or other retirement savings accounts, you may qualify for the Retirement Savings Contribution credit. You may even be able to claim the credit if you received matching contributions from your employer.
For instance, let’s say you qualify for the the highest level of the credit (a credit of 50% of your contribution). If you contributed $1,000 to your fund and your employer contributed $500, you could get a $500 tax credit (half of your contribution).
3. Child Tax Credit (expanded for 2009-2010)
The Child Tax Credit allows parents to claim up to a $1,000 credit per child under the age of 17. However, prior to Feb. 2009, the credit was of no use to low-income families because it was set at 15% of the amount by which a family’s earnings exceed a threshold of $8,500.
In other words, if a family made $9,000, they would only receive $75 total or $37.50 per child ($9,000 – $8,500 = $500 x 0.15 = $75). In February, the threshold was lowered to $3,000 so that the same family could now receive $900 total or $450 per child.
In an effort to help create an energy-efficient society, a number of energy tax credits have emerged based on certain home upgrades and appliances homeowners purchase. You could receive a credit of up to 30% of the cost up to $1,500 for adding energy-efficient doors and windows, or even 30% of any cost for adding solar water heaters.
There are tons of credits to take advantage of, so be sure to review your latest energy-efficient purchases before filing your tax return.
The Hybrid Car Tax Credit allows you to receive money back for purchasing a hybrid car. This credit is unique because it has a phase-out process based on the number of hybrid cars that a manufacturer has sold. On average the phase out occurs within four years of the vehicle’s manufacture date – as long as the car was manufactured after Jan. 1, 2006.
To learn more about this credit, visit FuelEconomy.gov.
6. Credit for the Elderly or Disabled
This credit may be available to individuals aged 65 or older, or those retired on permanent and total disability that have taxable disability income. The income limits associated with the credit, which could reach as high as $10,000 for married couples, are generally $25,000 for married couples filing jointly and $17,500 for singles.
7. Foreign Tax Credit
The Foreign Tax Credit allows investors and people working abroad to take advantage of a tax reduction on their U.S. taxes based on the amount of tax they paid to foreign governments. This helps U.S. taxpayers avoid double taxation.
You may qualify for the Adoption Tax Credit if you adopted a child and paid out-of-pocket expenses related to the adoption. If payments were made prior to the year the adoption became final, the credit is generally allowed for the year following the year of payment. However, it’s good to keep in mind that this credit is not available for any reimbursed expense.
If you pay for day care expenses for your children or disabled adult dependents, you may be eligible for the Child & Dependent Care Tax Credit. Basically, the credit reduces the taxes based on how much you spent on these types of services. The credit is typically up to $3,000 for one dependent or $6,000 for two or more dependents.
Here are a few limited-time tax credits that you may also want to consider:
- American Opportunity Tax Credit (2009 through 2012 only) This tax credit provides up to $2,500 to people who are pursuing undergraduate education. This credit is said to replace (or expand on) the former Hope credit. However, it is only scheduled to be effective for the years 2009 and 2010.
- Making Work Pay Tax Credit (2009 and 2010 only) Depending on how you receive your income, this $400 credit may be automatically added to your pay checks in the amount of roughly $33 a month. However, if you are a sole proprietor or contractor who doesn’t have your taxes automatically deducted from your income, you could claim this credit when filing your tax return.
- First-Time Homebuyer Tax Credit (2009 and 2010 only) This is another credit that is only offered for a limited time, but is a handsome credit. Originally, the First-Time Homebuyer Credit was a credit of up to $8,000 that was only available to homeowners buying their first home in 3 years or a longer period of time. However, this credit, which was set to expire in Nov. 2009, was extended to April 30, 2010 and now also offers up to $6,500 to homeowners who want to upgrade to bigger homes.
Because a tax credit is essentially free money, you don’t want to miss out on its benefits. So before filing your 2012 tax return, take advantage of the credits you qualify for.