Tax Credits

A tax credit is defined as "the direct dollar-for-dollar reduction in an individual's tax liability" (Tax Credit). Tax deductions reduce the amount of income that is taxable, and tax credits reduce the actual amount of tax owed. A tax credit that is refundable can result in the taxpayer receiving a refund check if the credit is more than the total tax due. There are many tax credits available to taxpayers. A few of the more common tax credits will be discussed.

Child and Dependent Care Credit

The Child and Dependent Care Credit is a percentage of total work-related child and dependent care expenses that are paid to a person or business that provides the care. This credit can be up to 35 percent of qualifying expenses, depending upon the taxpayer's income. In order for married couples to claim the credit, both individuals must earn income, or one individual must earn income while the other was a full-time student or physically or mentally incapacitated.

Child Tax Credit

The Child Tax Credit is a nonrefundable credit up to $1,000 per child depending on taxpayer income. This credit can be used by people with a qualifying child. A qualifying child is a dependent son, daughter, stepchild, adopted child, grandchild, or eligible foster child who is under age 17 by December 31 of the filing year. The child tax credit may be used in addition to the child and dependent care credit.

Additional Child Tax Credit

The Additional Child Tax Credit is a refundable credit up to $1,000 per child for specific taxpayers who receive less than the entire amount of the Child Tax Credit.

Adoption Expense Credit

The Adoption Expense Credit is a credit of up to $10,400 for qualified expenses associated with adopting an eligible child. Reimbursed expenses may not be used for this credit. Qualifying expenses include the following:

- Reasonable and necessary adoption fees

- Court costs

- Legal fees

- Travel expenses (including meals and lodging while away from home)

- Other expenses directly related to the legal adoption of an eligible child

Education Credits

Education Credits are credits for educational expenses. These credits are phased out as income increases. There are two types of Education Credits:

1) Hope Credit - A credit of up to $1,500 per year per student.

2) Lifetime Learning Credit - A credit of up to $2,000 per year.

Alternative Motor Vehicle Credit

The Alternative Motor Vehicle Credit is a credit that taxpayers may use when they purchase certain energy efficient vehicles, including Qualified Hybrid vehicles. In order to qualify for the alternative motor vehicle credit, the vehicle must be purchased new; the vehicle must be placed in service after 12/31/2005 and purchased by 12/31/2010; the taxpayer must be the original owner; the vehicle must be purchased for the taxpayer's use; and the vehicle must be used primarily within the United States.

Earned Income Tax Credit (EITC)

The Earned Income Tax Credit (EITC) is a refundable federal income tax credit for low-income workers and their families. In order to qualify for the EITC, income in tax year 2006 must be less than $38,348. If the EITC is above the amount of taxes owed, the taxpayer will receive the difference in the form of a refund.

References

"Tax Credit." WebFinance website. URL: http://www.investorwords.com/4888/tax_credit.html