My grandma used to say that having children generally is a blessing, but I would add that children also can be helpful from a fiscal standpoint. If you have little ones and take care of them during a specific fiscal year, you can claim them as dependents and get a child tax credit. The sweet thing about a child tax credit-and all tax credits, for that matter, is that it directly reduces your income tax liability, meaning it leaves more money in your pocket after April 15.
By hiring the right tax accountant and tracking your expenses methodically, you can save money come year-end, especially if you can adeptly use tax credits that lower your tax bill by a substantial margin. Hiring a professional to handle your taxes is a smart thing, especially if fiscal matters are not your strong suit, but I would recommend you also read the Internal Revenue Service's expansive online resource on tax credits and how they can help you save some cash during a specified tax year-or over time. Tax credits that can diminish your fiscal tab run the gamut from lifetime learning credit and education credit to child and dependent care credit, Hope Scholarship credit, and credit for the elderly and the disabled. Here are some of the best tax deductions and credits that you should aim for if you qualify.
Before We Move On: Understand the Difference between Tax Credit and Fiscal Deduction
Don't be confused when you hear words like "tax deduction" and "fiscal credit." They mean different things; a tax deduction reduces your income that is subject to tax, whereas a fiscal credit reduces your final income tax. For example, say you made $50,000 last year and you are in the 25% tax bracket. Your total itemized deductions amount to $10,000, which brings your taxable income down to $40,000-and thus brings your tax debt to $10,000, or $40,000 multiplied by 25%. If you have tax credits of $4,000, your final fiscal liability-same thing as debt-would equal $6,000, or $10,000 minus $4,000.
Child and Dependent Tax Credit
If you work and hire someone else to take care of your children, you may be eligible to claim a child and dependent care credit. The credit, in essence, pays you back for money you doled out on things as varied as day care, daily maintenance, and hygienic monitoring. Keep track of money you pay the babysitter throughout the year and make sure to report it at year-end, providing, of course, the babysitter's information-including Social Security number, amount paid, and address-on your tax return.
When it comes to the babysitter's information, an important thing I want to mention is that you still can claim the child and dependent care credit even if the babysitter does not have a Social Security Number or does not want to give you the number. The IRS allows you to claim the credit if you can prove that you exercised "due diligence" in trying to get the SSN information. What "due diligence" exactly means often is murky, so contact your local IRS Taxpayer Assistance Center to get more information.
Lifetime Learning Credit
The good thing about this country is that we have freedom of expression as well as liberty to do everything we want-subject to certain restrictions, of course. So if you want to go to school for life, you can. A lifetime learning credit reduces your tax debt if you spend money on qualified tuition and related costs of higher education. Note that the credit is nonrefundable, meaning it can reduce your income tax liability to zero and the IRS would not refund you anything if, say, your tax debt were negative. For example, say your income tax liability equals $2,000 and your lifetime learning credit is $2,500. After applying the credit, your income tax debt would be minus $500, or $2,000 minus $2,500, but the IRS would not refund you the $500.
An education credit is similar to a lifetime learning credit in that it lowers your overall tax bill, but there are minor differences. To qualify for the education credit, you must have qualified academic expenses-meaning you must attend a recognized and accredited institution-for the year under review, and the credit must fall within your modified adjusted gross income for that year.
The education credit covers tuition fees, school supplies, and other learning-related money you forked over, but make sure the school is recognized-I cannot emphasize this enough. Don't expect the IRS to grant your education credit if you enroll in those "mom and pop," two- or three-classroom institutions that promise to give you a certificate, not even an academic degree, in 12 to 18 months.
Hope Scholarship Credit
You clearly can see that Uncle Sam assigns fiscal and political prominence to education because this is the third learning-oriented credit we are talking about. The Hope Scholarship is a little convoluted, so read on closely to understand its subtleties.
First, the Hope Scholarship credit is refundable up to 40%, meaning you get some cash from the IRS if your tax debt is negative after applying the credit. Note, though, that the maximum amount you can claim is $2,500, which means that the maximum amount refundable is $1,000 ($2,500 multiplied by 40%).
Second, and this is the most important, you may be eligible for the Hope Scholarship credit if you meet all the below criteria:
- You fork over money for tuition and related costs for the first four years of post-high-school education,
- The cash you paid went for the education of an eligible student,
- You write down the name and Social Security Number of the eligible student,
- Your modified adjusted gross income does not exceed numerical thresholds established by the IRS,
- Someone else has not listed you as a dependent on his or her tax return-your parents, for example
- Your filing status must be "married filing jointly" if you are married,
- You have not claimed the lifetime learning credit for the same student during the year under review, and
- You must elect to be treated as a resident alien for tax purposes to benefit from the Hope Scholarship credit for any part of the year under review.
Credit for the Elderly and the Disabled
You can claim a credit for the elderly and the totally and permanently disabled-that's the IRS' phrase, not mine-if you were at least 65 years old during the year under review, and you were permanently disabled when retiring or retired on disability.
Note, however, that even if you meet the disability criteria, you still may not claim the credit if your adjusted gross income is higher than certain numerical thresholds that the IRS adjusts each year. The same monetary limit applies to the total of your nontaxable disability plus nontaxable annuities plus nontaxable pensions plus nontaxable Social Security payments.
The bottom line is, the IRS doesn't want you to claim the credit if you are retired but live comfortably.
You can save money with tax credits, but make sure you do your homework in advance and talk to the right people before filing your fiscal paperwork. You also must pay special attention to your tax documentation and keep receipts closely, so that you can reliably convince the IRS you spent money on things that you claim, and therefore that you deserve to earn the related tax credit. Fiscal credits that can bring some cash into your pocket include education credit, credit for the elderly and the permanently and totally disabled, and the child and dependent tax credit.