Taxes - Head Matters

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6. Tax Credits


To encourage certain behaviors, the government offers tax credits.  For example, because of a potential energy shortage, the government encourages us to install solar panels on our homes. If we do, we may have earned a tax credit.  A tax credit is better than a deduction because it directly decreases the amount of taxes we pay dollar-for-dollar.  A deduction, while still good, only lowers the gross income on which you are taxed.  If you have a $3,000 expense for solar panels and you pay 15 percent of your income in taxes, you save $450 as a deduction off your income.  With a tax credit you save the entire $3,000 as it is subtracted directly from the amount of tax you owe the government.    

Another common tax credit is the amount you pay for child care.  This amount, up to a certain limit determined by the government, is subtracted directly from the tax you owe after it is calculated on your tax return.
 

Earned income tax credit
Sometimes, if we don’t make much money, we can apply for “earned income tax credit (EITC).” This is a tax credit, which in some cases is a refund even if we didn’t pay any tax or little tax.  The requirements for EITC are:
 

  • Must have a valid Social Security Number
  • Must have earned income from employment or from self-employment
  • Must not be filing as “married, but filing separately”
  • Must be a U.S. citizen or resident alien all year, or a nonresident alien married to a U.S. citizen or resident alien and filing a joint return
  • Cannot be a qualifying child on another person’s tax return
  • Must have a qualifying child OR
    • be over age 25 but under 65 at the end of the year,
    • live in the United States for more than half the year, and
    • not qualify as a dependent of another person

For more information on taxes, the Internal Revenue Service (IRS) offers a frequently asked questions page with many answers to tax questions at http://www.irs.gov/faqs/index.html if you don’t find the answer to your question on the website, you can call the IRS hotline at 1-800-829-4933. 

Exercise: Categorizing for Your Tax Return

Directions: Below are listed some items that may be seen on a tax return. Mark whether they are income (I), deductions (D), exemptions (E), or credits (C).

  I D E C
1. Interest on a bank savings account.
2. Contributions to the Red Cross, a charity
3. You provide more than half the support for your grandma who lives with you
4. Solar panels
5. W-2 earnings
6. Mortgage interest
7. Eye glasses
8. Child care
9. You!

Current Course:
Taxes

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