Money Matters: Giving tax credits where they're due can pay off
From a new baby to a new hot water heater, there are a list of items that can help shave thousands of dollars off your taxes. YNN's Tara Lynn Wagner filed the following "Money Matters" report.
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If you thought deductions were exciting, what's next is really gonna knock your socks off. I'm talking about that most coveted of tax words: Credits.
"We love tax credits because it's a dollar for dollar reduction in the amount of tax you pay," says Certified Public Accountant John Vento.
As opposed to a tax deduction, which lowers your taxable income, credits ultimately reduce the amount of taxes you'll pay and the difference can be significant.
"If you have $1,000 tax deduction, and you're in the 25 percent tax bracket, you'll save $250 in taxes, which is terrific. But if you have $1,000 tax credit, that will be a $1,000 more that you may see coming back in the form of a refund," says Vento.
A thousand dollar credit may not be hard to find. For one thing, if you have children, you may be able to claim up to a $1,000 tax credit per child. Need to put those kids in day care? There's a credit for that as well, provided that arrangement is necessary for you to go to work.
"The amount of money that you pay for that care, multiplied by a specific percentage depending on your income level, creates a credit up to $1,050 for one child or $2,100 if you have two or more children," explains Jackson Hewitt Chief Tax Officer Mark Steber.
The Child and Dependent Care Credit actually applies to dependents of any age, as long as you are responsible for that individual's care.
"A qualifying family member that has either moved in with you or that you are taking care of. The taking care of a dependent parent is all too common," says Steber.
There are also a few credits to cover the cost of higher education, like the American Opportunity Credit or the Lifetime Learning Credit.
"Those credits are pretty substantial. Could be $2,000, could be $2,500, direct reduction in the amount of tax you pay," notes Vento.
Finally, there's the Residential Energy Credit. Worth up to $500, it's the government's way of encouraging you to go green.
"So they're telling you to go out and buy a new window, put in a new front door, get a storm door, insulate those walls," explains Vento. "In essence the government is subsidizing your cost of making those energy efficient improvements to your home.
For more information how to claim these and other credits, visit irs.gov.