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Tax credits: The better way to cut your IRS bill
 When
it comes to taxes, credits are the preferred way to cut your bill.
While deductions, either itemized or standard, reduce
your amount of taxable income, credits cut your actual tax bill,
dollar-for-dollar. That's because credits come into play AFTER your
tax liability is figured. So if you owe Uncle Sam $500, a $250 tax
credit will cut your bill in half.
Two types of tax credits
Similarly, some credits are more valuable than others.
Refundable credits may eliminate any tax you owe and
provide you with a refund. Even if your tax bill is zero, you could
get money back from the Internal Revenue Service. These credits
include:
- Earned income tax credit
- Additional child tax credit
- Credit for taxes withheld on wages and other amounts
Nonrefundable credits can take your tax down to nothing,
but you can't get money back from the government. Popular nonrefundable
credits are:
- Child tax credit
- Child and dependent care credit
- Credit for the elderly or disabled
- Retirement savings contributions credit
- Adoption expenses credit
- HOPE and Lifetime Learning education credits
These credits can't be used to get a refund on your
tax return. With the adoption credit, however, you can carry forward
unused amounts from year to year until the credit is absorbed, or
the carry-forward period expires, whichever is first.
Tax law changes enacted in 2001 also make the child
tax credit partially refundable for lower-income families.
When claiming credits on your federal income tax return,
only the earned income credit can be taken by Form
1040EZ filers. To get the benefit of the other credits, you
must use Form
1040 or Form
1040A, and some of these credits require you to fill out additional
forms.
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