Personal Income Tax Credits

Personal Income Tax Credits

An income tax credit exists for the purpose of decreasing the amount of your income that is taxable by the IRS. They can be a significant source of savings by decreasing the amount of taxes that you are required to pay. Income tax credits are categorized as Personal Tax Credits, as they affect you personally.

Although there are a variety of tax credits available for you to utilize, in order to claim them you must meet the restrictions and/or qualifications that each tax credit has attached to it. You also need to be aware that some of these tax credits are not refundable if the amount you would receive in a tax credit exceeds your tax liability (i.e., the government will not charge you any money, but they are also not going to pay you any.) However, there are some few that are refundable even above and beyond your tax liability.

Non-Refundable personal tax credits include: mortgage interest credit, education credits, adoption credit, child tax credit (generally), dependent care credit, credit for the elderly and disabled, and retirement savings credit. Each of these tax credits are allowed only to the full extent of your tax liability. You must also be aware of the exception and stipulations to the child tax credit.

Refundable personal tax credits include: earned income credit, health coverage credit, and the additional child tax credit. For these credits, you can receive a cash refund for the excess amount of the credit over your tax liability.

An example of how these tax credits work is the dependent care credit, which applies to persons holding full-time jobs that need to pay for others care (usually children or elderly) in order for them to work. The amount paid out for care is referred to as care costs. In order to receive this tax credit, you must meet the following requirements: have an earned income, maintain a house for yourself and the qualifying dependent, and pay outside help for their care while you are at work. The credit ranges between 20-35% of your total care costs, with a set limit of expenses for the 2010 care costs of one dependent.

This is only one detailed example of the available tax credits. If you need more information, refer to IRS Publication 503 - Child and Dependent Care Expenses. You will also find IRS Form 2441 (Child and Dependent Care Expenses) helpful. Also, in order to claim the dependent care credit you must include their tax identification number on your Form 1040 when filing your tax return.

Article written by: Letty G.

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