Keeping track of deductible expenses is smart, but tracking your qualification for tax credits is even better. Tax credits work much like tax payments; that is, they offset your tax liability dollar for dollar.
Here’s an illustration: Suppose you owe $750 in federal income tax. If you’re eligible for a $500 credit, you’d subtract that from the $750 to arrive at your final tax bill of $250.
The tax code is full of tax credits, both for individuals and businesses. Here are just a few:
* Education credits
* Child and dependent care credit
* Child tax credit
* Adoption credit
* Foreign tax credit
* Research credit
* Energy credit
* Credit for the elderly
* Retirement savings contribution credit
* Alternative minimum tax credit
* Disabled access credit
* Health insurance credit
* Pension plan startup credit
* Work opportunity credit
Most tax credits have specific requirements, and many are subject to income limitations. Don’t overlook tax credits in your tax planning; find out how to qualify for those that could reduce your tax bill.