8 Federal Tax Credits to Get More from Uncle Sam
By Jackie Waters, Guest Contributor from Hyper-Tidy.com
Every year, federal tax credits can change. Some get added, others are taken away, and changes may occur within the ones that have been around for ages. Tax credits are one way to maximize how much of your money you get to keep. In some cases, they feel a bit like a tax-free “bonus” to offset costs. However, most taxpayers only know about a few federal tax credits—and the majority of taxpayers don’t have a clear understanding of what those credits entail.
Tax credits and tax deductions are wildly different, but often confused. Deductions reduce your taxable income. The goal is to reduce your income as much as possible so you ideally fall within a lower tax bracket (and thus pay less in taxes). However, credits reduce taxes directly and aren’t tied to tax rates. Still, the actual value of each credit might be informed by your basic tax liability. There are also nonrefundable credits which can reduce your taxes to zero, but anything leftover is lost (in other words, you won’t be getting a check for the difference).
Most tax credits are aimed at families and parents, and include:
- Child Tax Credit. For the 2016 tax year, you can claim up to $1,000 per child. This credit is designed to offset the costs related to caring for children.
- Child and Dependent Care Tax Credit. This credit is available on a case by case basis. If you paid someone to take care of your child or dependent who is under 13 years old, you likely qualify. However, this credit works more like a deduction (which is how they can get so confusing!).
- Adoption Tax Credit. Adopting a child can be expensive. Taxpayers can claim up to $13,460 for the 2016 tax year for each child. Adopted children must be under 18 years old, or over 18 if they have special needs.
- Credit for the Elderly and Disabled. If you’re over 65 years old, or if you’ve already retired and have a permanent disability with taxed disability income, you may be eligible for this credit. However, there are income limitations.
Home, Sweet Home (and other Credits)
The second most popular credit category is for homeowners. Buying a home is probably the most expensive purchase you’ll ever make, and Uncle Sam can help ease the burden. There are also special credits for employees, medical expenses and more:
- Home Energy Tax Credits. If you installed a green, renewable-energy item in your home, you can get a credit of up to 30 percent of total expenses. However, not all items qualify. Popular items include solar panels and geothermal heat pumps. Talk with your CPA about qualifying purchases.
- Earned Income Tax Credit. One of the most well-known credits, this one is for those who had low or moderate incomes in 2016. Also known as the EITC, it helps reduce taxes, and may even qualify you for a refund.
- Foreign Tax Credit. If you worked outside the United States, the FTC is designed to protect against double taxation. You don’t pay federal or state taxes for the money earned while you worked abroad, but you do still pay Medicare and Social Security taxes.
- Premium Tax Credit. If you have low or moderate income and bought health insurance via the Health Insurance Marketplace, you may qualify to have a credit paid to your insurance company to minimize monthly premium payments. Another option is to claim the full credit on your taxes.
These are just a few of the tax credits you may qualify for during the 2016 tax year. As you plan for next year’s taxes, pore over the qualifications to make sure you’re not overpaying or missing out on any credits (check out some software here that may help you). The sheer volume of tax credits available is another reminder of how critical a CPA can be when planning your financial future.
About Jackie Waters
Jackie Waters is a mother of four boys, and lives on a farm in Oregon. She is passionate about providing a healthy and happy home for her family, and aims to provide advice for others on how to do the same with her site Hyper-Tidy.com.