Tax Credits

There are a number of tax credits that are available to individual taxpayers and small businesses. Unlike tax deductions which reduce your taxable income, tax credits reduce the actual tax dollar for dollar. The following is a rundown of the more commonly available tax credits.

Making Work Pay Credit - “Making Work Pay,” which was part of the American Recovery and Reinvestment Act of 2009” (the 2009 Economic Stimulus Act), is a new credit which the Obama administration says will cut taxes for more than 95% of working families in the United States. It provides a refundable credit of 6.2% of a taxpayer’s earned income not to exceed $400 for individuals and $800 for joint filing couples.

Saver’s Credit - This is a credit to help finance IRA and pension plan contributions for lower income taxpayers. Find out what you need to know about this credit.

Pension Start-Up Credit - This is a credit to help small businesses establish pension plans. Learn more about this credit and see if it applies to you.

Purchasing or Purchased a Hybrid Vehicle? If so, you may benefit from a substantial tax credit.

Educational Tax Credits - The law provides for two nonrefundable tax credits, the Hope Scholarship and the Lifetime Learning Credits.

Home Energy Credits - The “American Recovery and Reinvestment Act of 2009” (the 2009 Economic Stimulus Act) expanded the residential energy improvement credit for 2009 and 2010 (this credit was last available in 2007) and extended and expanded the tax credit for residential solar and fuel cell equipment through 2016. This gives taxpayers who want to “go green” a chance to offset some of the cost of going green with tax credits.

The Earned Income Credit - The Earned Income Tax Credit (EIC) provides a refundable tax credit for people who work, but have lower incomes. If a taxpayer qualifies, it could be worth up to $5,028 for 2009. Thus, a taxpayer will pay less federal tax or even get a larger refund.

Child Tax Credit - Taxpayers who have a qualified child may qualify for the Child Credit. The maximum credit amount is $1,000 through 2010 and then will drop to $500 beginning in 2011.

Child & Dependent Care Credit - A nonrefundable tax credit is available to some taxpayers for the expenses incurred for the care of a child, spouse, or other dependent while the taxpayer is gainfully employed (or is job seeking). In addition, employer dependent care assistance programs allow employees to exclude from income certain payments expended for child and dependent care.

Adoption Credit - Adoptive parents may be able to claim a dollar-for-dollar tax credit for the “qualified” expenses of adopting a child up to $12,150 for 2009 ($11,650 for 2008) for each adopted child. That is equivalent to a deduction of over $48,500 for a taxpayer in the 25% tax bracket.

Work Opportunity Tax Credit - Employers can qualify for a tax credit known as the work opportunity tax credit (WOTC) that is worth as much as $2,400 for each eligible employee (higher amounts for certain veterans and other special categories). The credit is available on an elective basis for employers hiring individuals from one or more of several targeted groups.

AMT Tax Credit – The Alternative Minimum Tax Credit is a frequently misunderstood and overlooked tax credit. Oversimplified, the alternative minimum tax credit is the result of incurring an alternative minimum tax (AMT) in a prior year, which generates a credit that can be used to offset the excess of the taxpayer’s regular tax over the alternative minimum tax in a subsequent year, with unused credit carried forward to future years.

First-Time Homebuyer’s Credit Recapture – For a very limited period of time, first-time homebuyers can qualify for a special tax credit to assist taxpayers with the down payment on a home.

This is for informational purposes only and should not be construed as tax advice. Please consult your tax advisor regarding your specific situation.