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