Tax credits are one of the most advantageous ways to lower your income taxes. Credits reduce your tax bill dollar for dollar. On the other hand, a tax deduction only reduces your taxable income, making your benefit determined by your individual tax bracket.
For example, a tax deduction of $1,000 will lower your tax bill by $220 if you are in the 22% tax bracket. A $1,000 tax credit will lower your tax bill by $1,000.
Here are some of the most common tax credits:
- Earned Income Credit. The EIC 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. In addition, qualifying children may increase the amount of the credit.
- Child credit. Taxpayers who have dependent children under age 17 may be eligible for a child tax credit of $2,000 per child.
- Business credits. There are numerous credits available to businesses. They include the research credit the work opportunity credit, the disabled access credit, and the low-income housing 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.
- Dependent care credit. Expenses paid for the care of dependent children under 13 and certain other dependents may qualify for a credit.
Ensure you do not overlook valuable credits that could reduce your taxes. For more information on other ways to reduce your taxable income read our blog post for tax-reducing tips.
