Is There a Tax Credit or Deduction for You?
FOR IMMEDIATE RELEASE
April 3, 2013
Is There a Tax Credit of Deduction for You?
No one has
ever said that our federal income tax policy is simple. One purpose of federal
income taxes is to raise funds to pay for federal expenses such as national
defense, healthcare, and social programs. In addition, our income tax policy is
also designed to encourage financial behaviors. Being aware of the different
tax deductions and credits can help your financial planning.
example, our tax policy encourages home ownership. Home owners, who itemize
their deductions, can deduct their mortgage interest from their income. This
tax deduction especially benefits those individuals with higher incomes.
According to the Tax Policy Center, a taxpayer in the top tax bracket saves
$39.60 for each additional $100 of mortgage interest whereas someone else in
the 15 percent bracket saves $15.00. If you are considering buying a home
because you think it'll provide a large tax savings, take time to check what
the effect will actually be on your tax situation.
policies recognize the costs of having children and are designed to help young
families such as the Child Tax Credit. If you have a qualified child, you may
be eligible for a credit up to $1,000 per child. This credit does phase-out at
higher incomes. Related to this, if you paid someone to care for your
child, or another family member, you may be able to claim the Child and
Dependent Care Credit as well.
Understand that tax deductions are different than tax credits. Tax
deductions reduce the amount of your income that is used to calculate the tax
amount you owe, and usually require that you itemize your taxes. While this is nice,
tax credits are better as credits are subtracted from the tax you owe, and
sometimes you can even receive cash back from the federal government.
The Earned Income Tax Credit (EITC) is a refundable federal income tax
credit for low to moderate income working individuals and families. Qualifying
for the EITC (and the amount of the credit) depends on your income, marital
status, and number of qualifying children.
For example, if your earned income and adjusted gross income in 2012 was
less than $45,060 (or $50,270 married filing jointly) with three or more qualifying
children, then you may qualify for up to $5,891 tax credit. However, if your
earned income is less than $13,980 with no qualifying children, you may still
qualify for a tax credit up to $475. Approximately 20% of qualifying families
do not receive this tax credit. Do take the time to check to see if you
EITC is a refundable tax credit. The EITC can reduce your federal
tax liability to zero and then any leftover credit is sent to you. You must file a federal income tax return to
claim this credit.
Employer-sponsored retirement plans (which are tax-deferred) and IRAs are
another example of tax policy encouraging financial behaviors; in this case,
saving for retirement. The Savers Credit also rewards saving for retirement. If
you contributed to an IRA or to a 401(k) plan or a similar workplace
retirement program, then you may be eligible.
The Saver's Credit can be claimed
by married couples filing jointly with incomes up to $57,500; heads of household
with incomes up to $43,125; and married individuals filing separately and
singles with incomes up to $28,750 in 2012. The Saver's Credit can increase a
taxpayer's refund or reduce the tax owed – on average from $100 to $200.
To learn more about these and other
tax deductions and credits, ask a qualified financial professional or visit www.irs.gov.
And, what shall you do with the tax
refund you receive from a credit? Think about saving at least a part of it
towards a long-term goal! For more tips about taxes, visit University of
Illinois Extension's Plan Well, Retire Well Facebook page at www.Facebook.com/PlanWellRetireWell.
Source: Kathy Sweedler, Consumer Economics Educator, University of Illinois Extension, April 2013
Source: Kathy Sweedler, Extension Educator, Consumer Economics, firstname.lastname@example.org