Federal Tax Credit Information

A tax credit is a conceptual benefit that a governing tax body extends to qualifying individuals for the purposes of reducing an individual’s taxable liabilities. In the U.S., tax credits are available at both a state and federal level for income tax purposes. Taxpayers can take advantage of these credits pre-taxation to decrease their income tax liabilities or potentially increase the amount of overpaid taxes owed to them, thus increasing their income tax refund at the end of the fiscal year. Credits are arguably more favorable to taxpayers than deductions and allowances, as credits apply directly to the tax liability itself, while deductions and allowances only apply to taxable income and thus, only affect a marginal percentage of a taxpayer’s overall liability.

The child tax credit allows eligible taxpayers to claim a set one-time credit (up to $1,000 in 2010) for each dependent child. Taxpayers with qualifying dependent-children under 18 years of age can claim the child tax credit if they meet the income guidelines for the year. The IRC regularly adjusts the total per-child tax credit and the maximum income cap to account for inflation. Unlike other federal tax credits, the child tax credit does not increase taxpayers’ refund amount, and taxpayers can only claim a maximum credit equal to the amount of tax liability they owe. Taxpayers can determine their eligibility and calculate their total child tax credit by completing the Child Tax Credit Worksheet attached to IRS Form 1040.

The child care tax credit allows eligible taxpayers to claim between 20 and 35 percent of their childcare expenses. To qualify, a taxpayer must have a child-dependent aged 12 or younger, you must provide at least 51 percent of the child’s expenses and the child must live with you. Children 13 years of age and older with certain physical or mental disabilities may also qualify taxpayers for the childcare tax credit. The child care tax credit can increase the amount of a taxpayer’s refund if the total amount of the credit exceeds a taxpayer‘s total liabilities.

The Earned Income Tax Credit, or EITC, is designed to reduce payroll tax liabilities for lower-income employees. While the EITC provides the most relief to taxpayers with qualifying dependent children, taxpayers with no dependents may still be eligible for a reduced credit. Taxpayers with dependent children may only claim the EITC for up to three dependant children; there are no additional credits for taxpayers with four or more children. The IRC adjusts the phase-out rate each year, so taxpayers will need to review the current EITC phase-out table to determine if they qualify.

Homeowners who installed certain certified energy-efficiency appliances and equipment federal energy tax credit may qualify for the federal energy tax credit. Homeowners must purchase new appliances and equipment; used appliances do not qualify for the credit. The appliances must have been installed in 2006, 2007, 2008, 2009 or 2010, and homeowners must plan to keep the appliances in place for at least five years after initial installation. The credit is equal to up to 30 percent of the total cost of the appliance or equipment and an additional 20% for appliances costing over $2,000, with a maximum total credit of $10,000 for each year a homeowner claims the credit. The energy tax credit does not increase the amount of a taxpayer’s refund.

The Hope credit is an educational tax credit available to taxpayers who incurred expenses for the first two years of postsecondary education for themselves and/or their dependents. For a taxpayer to qualify for the Hope credit, the applicable student must attend a college or university on at least a part-time basis for the entire two years. The credit allows up to $1,800 deduction for tuition and supplies such as schoolbooks for each eligible student for whom the taxpayer claims the credit. Taxpayers cannot claim the Hope credit and the Lifelong Learning credit at the same time. The Hope credit can increase the amount of a taxpayer’s refund.