Eight Tax Credits You Can Claim
You know that you have to pay taxes, but watching your hard-earned money disappear at tax time can be painful. Fortunately, the Internal Revenue Service (IRS) has a variety of federal tax credits that you may qualify for. When you claim a tax credit, your tax bill is reduced by the value of the credit. When you’re doing your taxes, consult your accountant or professional tax preparer about this list of tax credits:
1. Energy tax credits
As publicized by the U.S. Department of Energy, the IRS has a slew of consumer energy tax incentives, each with different criteria for eligibility:
- Residential energy property tax credit – If you’ve renovated to improve energy efficiency in the home, you may be eligible for this new tax credit. You can take a tax credit of up to 30 percent of the cost of qualifying renovations, such as installing energy-efficient insulation, roofs, walls, and windows or upgrading to energy-efficient heaters and air conditioners.
- Residential energy efficient property credit – You may qualify for a 30 percent residential renewable energy tax credit if you’ve invested in renewable energy, such as solar or geothermal for your home. You can qualify for this credit if you installed solar panels, wind systems, geothermal heat pumps, or other renewable energy systems. To apply for this credit, complete IRS form 5695.
- Hybrid vehicle credit – Under the alternative motor vehicle credit, the IRS rewards consumers who purchase qualified hybrid vehicles. This tax credit has several restrictions; for example, you may not qualify for the tax credit if the car manufacturer has sold more than 60,000 cars. The size of the credit depends on the weight and energy efficiency of the car.
2. First-time home buyer tax credit
The federal government stimulus acts in 2008 and 2009 approved first-time home buyer credits to stimulate the economy and boost the housing market. If you purchased a home in 2009, you may be eligible for an $8,000 tax credit. As long as the house you purchase is your main residence for three years, you don’t have to pay the government back. For more details about this tax credit, go to the question and answer section on the IRS website.
3. Retirement savings contribution tax credit
You know that saving enough for retirement is important, but it can be hard to budget monthly contributions to your IRA or 401k. If your adjusted gross income (AGI) is below a certain level, you may be eligible for a tax credit on a percentage of your retirement savings. The amount of the tax credit depends on your income and filing status (single, head of household, or joint filer), and the income eligibility requirements increase with inflation each year. The retirement savings contribution credit can be up to $1,000 for those filing a single income or $2,000 for those filing jointly. You can find specific information for the 2009 tax credit on IRS tax form 8880.
4. Earned income tax credit
The earned income tax credit (EITC) is a tax relief credit aimed at lower income workers. Recent college graduates may qualify for the EITC, especially if they only worked for part of the year. Like other federal tax credits, eligibility depends on whether you file singly or jointly and if you have children. Use the EITC Assistant to determine your eligibility for this credit.
5. Excess Social Security tax credit
Your employer probably withdraws Social Security tax from your paycheck, but if your income exceeds a certain level, you may be able to get some of that money back through the excess Social Security tax credit. In general, employers adjust withholding for workers with higher incomes, but your employer may not know to adjust it if you held two or more jobs that year. If this happens, you may be able to take the tax credit. For 2009, you only have to pay Social Security tax on your first $106,800 of income. Check current IRS guidelines each tax year to find out revised income levels. To find out if you qualify for excess social security tax credit, check out the information on the IRS website. To claim the credit, follow these simple instructions for recovering overpayments.
6. Education tax credits
College can be expensive, but you can get some of your investment back through these two education credits:
- Hope tax credit – The Hope credit is aimed at students from lower or middle income families and is a sizeable tax credit. Students are eligible for the Hope credit if they are in their first four years of higher education and are enrolled at least half-time. Since many college students are still dependents, parents usually file the Hope credit for their child. For 2009, eligible students can get as much as $2500 through the Hope credit. You can find out more about Hope credit eligibility requirements on the IRS website.
- Lifetime Learning tax credit – The lifetime learning credit picks up where the Hope credit left off. You are eligible for the lifetime learning credit anytime you take qualified higher education classes, even after you’ve entered the work force. Unlike the Hope credit, you don’t have to be enrolled at least half-time in a degree program – you can use the lifetime learning credit even if you take just one college class a semester. As of 2009, you can take a credit for 20 percent of eligible expenses up to $10,000. For example, if you have a $10,000 tuition bill, you get a tax credit of $2,000. However, if your tuition bill is higher than $10,000, you still only get a $2,000 credit. Like many tax credits, Lifetime Learning credit eligibility depends on income level.
7. Adoption tax credit
Adopting a child often involves many expenses, such as adoption fees, court costs, travel expenses, etc. The tax credit for adoption lets you recoup your expenses up to limits that may be changed from year to year. The 2009 credit limit is $12,150 per child adopted, but double-check IRS tax form 8839 for the year that you plan to file. You may be ineligible for the adoption credit if your income exceeds a certain level.
8. Child tax credit
If you have children, you may be able to claim a tax credit for each child. When you’re claiming the child tax credit, the amount of your credit depends on the number of children you have and your income level. Determine your eligibility and calculate the tax credit on the Child Tax Credit Worksheet provided by the IRS (this is for 2008 because 2009 isn’t available yet). Make sure you use the worksheet for the current tax year.
If you’re unsure about your eligibility for a tax credit or the amount you’re entitled to, double-check with an accountant or professional tax preparer – mistakes at tax time can lead to IRS audits and costly legal fees. If you decide to do your taxes yourself, you can use free tax calculators and online software designed to help people maximize their tax refunds. Also search the IRS official website – it has up-to-date tax information and easy-to-read tax guides. Take advantage of all the tax credits you can and wait for that refund to arrive.
By: Jessica Bayliss
Jessica Bayliss is a freelance writer specializing in finance and education. She has degrees from the University of Illinois and Texas A&M-Kingsville and is still learning all about what college forgot.