Tax Credits

Tax Credits

Why credits are better than deductions

Which credits are worth looking into and which aren't

A credit that mutual fund investors should investigate

Why credits are better than deductions

A credit reduces your tax liability dollar-for-dollar

Deductions only reduce your tax liability by a fraction of a dollar

If you're in the 28 percent bracket, a $100 dollar deduction reduces your tax liability by only $28

Get interested when you hear "tax deductible" but get excited when you hear "tax credit"

Which credits are worth looking into and which aren't

The child and dependent care credit

Worth looking into if you have children at day care, or an elderly dependent requiring care

But it's better to get your employer to provide child care payments as a tax-free fringe benefit

The child care credit depends on your AGI and number of children

If you have two children and an AGI of $15,000 you might qualify for a credit of around $1,300

If you have one child and an AGI of $25,000 you might qualify for a credit of around $500

The credit for the elderly or disabled

Not worth looking into unless you're very poor and don't receive much money from Social Security

If you receive Social Security benefits of $1,000 a month or more it's doubtful that this credit will help you

The earned income tax credit

Meant to compensate for payroll taxes paid by working poor

A "refundable" credit so you can get money even if you owe no tax

Subject to a lot of fraud

Paid to low-income workers with dependent children

A person with an AGI of $15,000 and two children might get a credit of $2,000

A person with an AGI of $20,000 and one child might get a credit of $1,000

A credit that mutual fund investors should investigate

If you have a mutual fund that holds foreign securities, you may be eligible for the foreign tax credit

This is a credit to compensate you for taxes that have been levied by a foreign country

Your mutual fund should send you information regarding foreign taxes paid

You can either deduct these taxes on Schedule A under "other taxes" or you can get a credit by using Form 1116

Remember, credits are better than deductions so using Form 1116 can save you money

But Form 1116 is more complex to fill out