Using Tax Credits To Lower Your Tax Bill

We are now in the last quarter of 2011. Now is the time to make all of the necessary adjustments to achieve your tax and financial results. One of the areas that should be considered in your tax plan is the use of tax credits to lower your tax bill.

What are tax credits?
Tax credits are not deductible from income; they directly reduce tax. As a result,
they are a great way to reduce taxes on a dollar for dollar basis.

Earned Income Tax Credit - IRC§32
This is a refundable credit for low-income working individuals and families.

Child Tax Credit - IRC§24
This credit is for people who have a qualifying child. The maximum amount of
the credit is $1,000 for each qualifying child. This credit can be claimed in addi-
tion to the credit for child and dependent care expenses.

Child and Dependent Care Credit - IRC§21
This is for expenses paid for the care of children under age 13, or for a disabled
spouse or dependent, to enable the taxpayer to work.

Adoption Credit - IRC§23
Adoptive parents can take a tax credit of up to $10,000 (adjusted for inflation)
for qualifying expenses paid to adopt an eligible child. The credit may be allowed for the adoption of a child with special needs even if taxpayer does not have any qualifying expenses.

Credit for the Elderly and Disabled - IRC§22
This credit is available to individuals who are either age 65 or older or are under age 65 and retired on permanent and total disability, and who are citizens or residents.

Education (American Opportunity) Credits - IRC§25A
There are two credits available:
1. Hope Credit - for the payment of the first two years of tuition and related expenses for an eligible student for whom the taxpayer claims an exemption on the tax return. and
2. Lifetime Learning Credit - available for all post-secondary education for an unlimited number of years.  
A taxpayer cannot claim both credits for the same student in one year. In 2009, the Hope Credit was modified and renamed the “American Opportunity Tax” credit.

Retirement Savings Contribution Credit – IRC§25B
Eligible individuals may be able to claim a credit for a percentage of their quali-
fied retirement savings contributions, such as contributions to a traditional or
Roth IRA or salary reduction contributions to a SEP or SIMPLE plan. To be el-
igible, you must be at least age 18 at the end of the year and not a student or an
individual for whom someone else claims a personal exemption. Also, your ad-
justed gross income (AGI) must be below a certain amount.

Work Opportunity Credit - §51
The work opportunity (formerly the targeted jobs) credit (§51) was created to
encourage employers to hire persons from the following groups:
(1) A vocational rehabilitation referral,
(2) A high-risk youth,
(3) A qualified veteran,
(4) An economically disadvantaged ex-felon,
(5) A qualified summer youth employee,
(6) Members of families receiving cash welfare benefits, and
(7) Individuals 18 to 24 who are in families that have been receiving food
stamps for at least a six-month period ending on the date of hire.

Welfare-to-Work Tax Credit – Formerly IRC§51A
The TRA ‘97 provided to employers a tax credit on the first $20,000 of eligible
wages paid to qualified long-term family assistance (AFDC or its successor pro-
gram) recipients during the first two years of employment. The credit is 35% of
the first $10,000 of eligible wages in the first year of employment and 50% of the
first $10,000 of eligible wages in the second year of employment.

This credit expired in 2005; but was recently expanded and reinstated through 2011.

Combo Credit - IRC§51
In 2007, the Work Opportunity and Welfare to Work tax credits were
combined under §51. The total amount of the credit is not changed but
the computation is made easier by coordinating the definition of “qualify-
ing worker.” However, separate computations apply for recipients of
long-term family assistance and summer youth employees.

Research & Development Credit - IRC§41
Increasing the amount spent on research and development provides a credit of
20% on qualifying expenditures exceeding average expenses in a base period. It has been extended through December 31, 2011.

Rehabilitation Tax Credit - IRC§47
The credit is 20% for rehabilitation of certified historical structures and 10% for
other qualified building originally placed in service before 1936 (§47(a)).

To qualify for the credit, the law requires the retention of at least 75% of the ex-
isting external walls, including at least 50% as external walls as well as, at least
75% of the building’s internal structural framework.

Low Income Housing Credit - IRC§42
Section 42 creates three separate credits that may be claimed by owners of resi-
dential rental projects providing low-income housing. The credit rate is set up so
the annualized credit amounts have a present value of 80% or 30% of the basis
attributable to qualifying low-income units, depending on the income of the ten-
ant qualifying for the credit.

The goal of tax planning is to arrange your financial affairs so as to minimize your taxes. Now is the time to review your tax situation to determine what are the last minute tweaking needed to achieve the desired goals.