Tax credits are a powerful way to lower your federal income tax bill. Why? Because a tax credit reduces your taxes dollar for dollar. A tax deduction, on the other hand, reduces your taxable income, so your benefit is determined by your tax bracket. For example, a deduction of $1,000 will lower your tax bill by $280 if you are in the 28% bracket. A $1,000 credit will lower your tax bill by $1,000.
Valuable Tax Credits to Keep in Mind
- Child credit. If you have dependent children under age 17, you may be eligible for a tax credit of $1,000 per child.
- Dependent care credit. Do you pay for dependent care so you can work? Expenses for the care of dependent children under age 13 and certain other dependents may qualify for a tax credit.
- Education credits. Two credits are available when you pay qualified college and vocational school expenses for eligible students. Under the American opportunity credit, up to $2,500 per student can be claimed for tuition and fees paid during the first four years of post-secondary education. The lifetime learning credit offers as much as $2,000 per family for post-secondary education expenses and for education expenses to acquire or improve job skills.
- Earned income credit. This credit is available for working families or individuals who meet specified income levels. How much you can claim is based on the amount of your earned income (wages and self-employment income), investment income and your family size and filing status.
- Adoption credit. Thinking of adopting? A credit of up to $13,400 per child is available for qualified expenses.
- Business credits. Federal income tax breaks for businesses include credits for hiring certain individuals, providing health insurance for your employees, establishing a retirement plan, and making your business premises accessible to the disabled.