Family Checkbook: Is there a tax credit or deduction for you?
By Kathy Sweedler/University of Illinois Extension
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, health care 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.
For 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. 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.
Other tax policies recognize the costs of having children and are designed to help young families such as the Child Tax Credit. You might be eligible for a credit up to $1,000 per child. This credit phases out at higher incomes.
Related to this, if you paid someone to care for your child or another family member, you might 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 they are subtracted from the tax you owe — and sometimes you can even receive cash back from the federal government.
The Earned Income Tax Credit 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. About 20 percent of qualifying families do not receive this tax credit. Do take the time to check to see if you qualify!
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, you might 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 $100 to $200.
To learn more about these and other tax deductions and credits, ask a qualified financial professional or visit http://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 http://www.Facebook.com/PlanWellRetireWell.
Kathy Sweedler is a consumer economics educator at the University of Illinois Extension. Contact her at 333-7672 or email firstname.lastname@example.org.