A tax deduction lowers the amount of reported income a taxpayer reports on page 1 of the (long) IRS Form 1040 BEFORE any tax liability is calculated. In comparison, a tax credit directly reduces the tax liability dollar-for-dollar. A tax credit is much better than a tax deduction. Most tax credits lower your tax liability to zero. Two tax credits listed below, the Earned Income Credit and the additional Child Tax Credit, however, are more valuable; they are refundable. This means you receive whatever remains (the balance) of the credit after all tax liabilities are paid. You can request that a paper version of an IRS publication be mailed to you by contacting the IRS by phone 800-TAX-FORMS (1-800-829-3676) or ordering the publications online at the IRS website, irs.gov An easy way to directly access ANY IRS publication (in PDF format) for viewing or download is to use the following subdirectory address: /pub/irs-pdf/pXXX.pdf. Replace the XXX with the publication number for a direct hyperlink to the publication.
Child and Dependent Care Credit compensates the taxpayer for the cost of providing care for a qualified child under 13 years of age or for a disabled spouse or dependent while the taxpayer works or seeks new employment. This credit can cover up to 35% of expenses. Furthermore, if you receive any Dependent Care Benefits (DCB) from your employer during the year, you may be able to exclude all or a portion from your income. IRS Publication 503, Child and Dependent Care Expenses, provides rules and detailed information. Replace the XXX above with 503.
Retirement Savings Contributions Credit (also known as the Saver’s Credit) targets low-and moderate-income taxpayers who contribute to an IRA or retirement program such as a 401(k) plan. This Saver’s Credit is applied in addition to other available tax credits. IRS Publication 590, Individual Retirement Arrangements (IRAs) provides detailed information. Replace the XXX above with 590.
Health Coverage Tax Credit (HCTC) is a tax credit that can be used to pay up to 80% of health insurance premium costs. It pertains exclusively to individuals receiving Trade Adjustment Assistance or Pension Benefit Guaranty Corporation (PBGC) benefits. You must be at least 55 years of age and have received or currently receive benefits from PBGC. The IRS rather than PBGC administers the program. Additional information is available at the PBGC website, pbgc.gov.
Earned Income Tax Credit (EIC) is a refundable tax credit that supports low-income individuals and families. This credit is based on income. For example, a single taxpayer without children between the ages of 25 and 64 who has lived in the US more than six months must have adjusted gross income (AGI) in 2009 less than $13,440 to receive EIC. IRS Publication 596, Earned Income Credit, provides seven rules and details how the income earned, investment income, and the number of dependents the taxpayer supports during the year affects the amount of credit received. Replace the XXX above with 596.
Child Tax Credit is specifically for taxpayers who have a qualified child under the age of 17 at the end of the tax year. This credit is applied against any existing tax liability. Any balance of the tax credit, called the Additional Child Tax Credit (IRS Form 8812), that remains is refunded to the taxpayer. Each qualifying child receives up to $1,000. The earned income floor for the refundable portion of this credit in 2009 is $12,550. This credit is offered in addition to the Child and Dependent Care Credit listed above. IRS Publication 972, Child Tax Credit, provides detailed information. Replace the XXX above with 972.