There is one thing that should get you more excited than deductions during the tax season, credits. Tax credits are substantially better than deductions because they reduce your tax bill dollar for dollar according to your credits.
Deductions merely reduce the amount you own by a percentage—meaning they will only give you a percentage of every dollar you claimed as a deduction. For explanations sake, imagine that you claimed $500 in deductions from the IRS.
They may only give you 50% of every dollar you claim, meaning that they’ll only reduce your taxable income by $250, instead of $500 like you claimed. Deductions don’t give grant you complete amnesty where that debt is concerned.
Credits, on the other hand, give you the full value for every dollar you claim. Dollar for dollar, your claims are removed from your taxable income.
That sounds a lot nicer than deductions doesn’t it? Focus on finding and using the tax credits that apply to you.
Here are a few examples of credits to consider as you do your taxes this year. First, look to find tax relief when paying for child-care while you work.
Some families require the parent’s to work in the home to make ends meet. While their children are young, child-care may be the only option to take care of the little ones until mom and dad can return home.
Tax credits are given to parents for between 20% and 35% of their taxable income used to pay for child-care. When you spend thousands of dollars for child-care, that 20-35% really starts to add up.
Take advantage of this option if you’ve been paying for child-care over the past year. For the next year, check with your employer to see if they offers a “child care reimbursement account.”
This is a legally set up account that will allow you to use income before it becomes taxable, meaning that the bill is paid for in full, but that money never shows up as your income.
Next up is the American Opportunity Tax Credit. This credit helps Americans going back to school for up to 4 years of post-secondary education.
It applies to monies paid for qualified tuition and course materials. You qualify for the credits if you are earning an adjusted gross income of $80,000 or less for an individual, or $160,000 or less for married couples that are filing jointly.
You receive bigger credits the smaller your yearly salary. The closer your salary gets to the qualification limit, the less credits you qualify for.
Finally, the savers tax credit is available to people contributing to eligible retirement plans. To make it easier for those planning on a 401k or other retirement plan getting them through old age, the government will help you by crediting you back some of the contributed money.
Would you agree that tax credits sound like a much better option than reductions. Find out more about tax credits that could help you by consulting with a tax attorney.
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