Tax Credits

             Tax credits are subtracted from your adjusted gross income to reduce your taxable income, thereby reducing your tax liability.  Some tax credits are subtracted directly from your tax liability, reducing the amount of tax you owe, or increasing the amount of your refund.  Most personal tax credits are only allowed up to the total of your tax liability, and cannot result in a refund if they are greater than your tax liability.  However, the additional child tax credit, earned income credit, and the health coverage credit are what are called refundable credits.  This means that if the amount of these credits is greater than your total tax liability, you can receive a refund for the extra.

            There are several different personal tax credits.  They are the child tax credit, the dependent care credit, the earned income credit, the adoption credit, the retirement savings contributions credit, the health coverage credit, the mortgage interest credit, the District of Columbia first-time homebuyer credit, the residential energy tax credits, the tax credit for hybrid vehicles and other alternative fuel vehicles, and the additional child tax credit.

            The child tax credit is basically a credit of $1,000 for each qualifying child under age 17 that you have at the end of the year.  However, the taxpayer must complete the Child Tax Credit Worksheet to determine the actual amount of the credit they are eligible to take.  If unable to claim the full amount, the taxpayer may be able to claim the additional child tax credit. 

            The credit for child and dependent care expenses is computed on Form 2441.  The amount of the credit varies depending on the amount you paid for care, the number of dependents, and your income.  There are certain requirements that must be met in order to claim the child and dependent care credit.  Some of these requirements relate to the provider of the care, such as ascertaining whether the provider is qualified for the purposes of this credit, and providing vital information about the provider.

           The earned income credit can be claimed by lower-income taxpayers with or without qualifying children.  For 2007, the maximum earned income credit amounts available are $2,853 if you have one qualifying child, $4,716 with more than one qualifying child, and $428 without a qualifying child.

            An adoption credit is also available, if you adopt a child under the age of 18, or a person who cannot care for himself or herself.  The maximum amount you can claim is $11,390.  To claim the adoption credit, you must file Form 8839 with your tax return.

            The retirement savings contributions credit is available to taxpayers making contributions to a retirement plan.  If your adjusted gross income is above the threshold amount, you will not be eligible for this credit.  If you are eligible, you need to file Form 8880.

            If you are eligible for the health coverage credit, you need to file Form 8885.  Form 8396 is used to claim the mortgage interest credit.  For the District of Columbia first-time homebuyer credit, Form 8859 is used.  If claiming the residential energy tax credits, you must file Form 5695.  Form 8910 is used to claim the tax credit for hybrid vehicles and other alternative fuel vehicles.

             Do you need help with figuring out your income taxes, including which schedules you might need to file and which expenses are allowed as deductions?  Then you are in the right place.  Try out the CPA search feature on this website to find a qualified professional in your area to assist you with all your tax and accounting needs.