With about a week to go before Tax Day, taxpayers are scrambling to find ways to reduce their tax bill. After all, the more you can save on your taxes, the more you can keep and invest in growing your business.
One of the easiest ways to pay less come tax time is to take advantage of existing tax credits. Credits are terrific for taxpayers because they reduce tax liability on a dollar-for-dollar basis. Deductions, in contrast, simply reduce your taxable income.
Here are six tax credits you won’t want to miss for the 2013 tax year:
Earned Income Tax Credit
One of the most popular tax credits is the Earned Income Tax Credit (EITC). To qualify for the EITC, you must have earned income from employment, including self-employment income. Earned income—like salary or wages—is different from unearned income (generally interest, dividends or other passive income).
To qualify for the credit, you must be least 25 years old and younger than 65 years old and not eligible to be claimed as a dependent on any other taxpayer’s return. You must also have a valid Social Security number (this is true for your spouse, too, if you're married) and your filing status must be single, married filing jointly, head of household or qualifying widow(er) with a dependent child; you may not claim the EITC if your filing status is married filing separately.
The credit is limited by income and varies according to your filing status. For 2013, earned income and adjusted gross income (AGI) must each be less than:
- $46,227 ($51,567 married filing jointly) with three or more qualifying children
- $43,038 ($48,378 married filing jointly) with two qualifying children
- $37,870 ($43,210 married filing jointly) with one qualifying child
- $14,340 ($19,680 married filing jointly) with no qualifying children
Your unearned income must be $3,300 or less for the year for you to qualify. If you meet all the criteria, you can earn up to $6,044 in an earned income tax credit. The best part? The EITC is refundable, so you may qualify for the credit—and thus, a refund—even if you don’t owe any taxes.
There are two credits you can apply toward your tax liability if you are a student or are supporting a student. The American Opportunity Tax Credit (AOTC) is a super-charged version of the former Hope Credit. The credit is worth up to $2,500 per eligible student. An eligible student must be pursuing an undergraduate degree or other recognized education credential, be enrolled at least half time for at least one academic period that begins during the tax year, and may not have a felony drug conviction.
Your income affects eligibility for this credit. Phaseouts apply to individual taxpayers whose modified adjusted gross income is at least $80,000 ($160,000 for married taxpayers filing jointly). As with the EITC, you can get money back from the AOTC even if you don’t owe taxes: If you qualify, 40 percent of the credit may be refundable.
The second education credit is the Lifetime Learning Credit, which is a credit of up to $2,000 for qualified education expenses paid for all eligible students. For this credit, you don’t have to be a full-time student or pursuing a degree. Phaseouts apply to individual taxpayers with an income of at least $52,000 ($104,000 for married taxpayers filing jointly). The Lifetime Learning Credit is not refundable.
You can't claim either of the education credits if someone else claims you as a dependent on his or her tax return. You also can’t claim the credit for expenses paid with tax-free scholarship, fellowship or grant money; a Coverdell education savings account; tax-free savings bond interest; or employer-provided education assistance. You also can’t claim the tuition and fees deduction and education credits for the same tax year.
Child and Dependent Care Credit
If you pay someone to watch a qualifying individual while you work or look for work, you may benefit from the child and dependent care credit. For purposes of the credit, a qualifying individual is your dependent child who is under age 13 or your spouse or other dependent who is physically or mentally incapable of self-care and has lived with you for more than half of the year.
Qualifying expenses for the purposes of the credit include payments made to a care provider who isn't your spouse, the parent of your child who is your qualifying individual, your child under age 19, or a dependent of yours or your spouse. You must provide the name, tax ID number and address of the person who performs the services: That means you can’t claim payments made under the table (one of many reasons why you should pay above-board).
If you're married, you must file a joint return in order to claim the credit. Additionally, both you and your spouse must work or be looking for work. To figure the credit, you can count up to $3,000 (for one qualifying individual) or $6,000 (for two or more qualifying individuals) worth of child and dependent care expenses. The credit is not refundable.
A tax credit may be available for taxpayers who adopted or began adopting a child during the applicable tax year. The credit is calculated based on “reasonable and necessary adoption fees,” which can include court costs, attorney fees, traveling expenses (including money spent for meals and lodging while away from home), and other expenses. For purposes of calculating the credit, income limits do apply. For 2013, phaseouts begin for modified adjusted gross income of $194,580 or more. Assuming you’re not subject to the phaseout, for 2013, you can claim up to $12,970 per eligible child.
The timing of the credit depends on whether the adoption is domestic or foreign, and whether the adoption has been finalized. A general rule is that for domestic adoptions, the credit is available for expenses incurred even if the adoption is never finalized. In contrast, for a foreign adoption, qualified adoption expenses are allowable as a credit only if the adoption has been finalized.
For 2013, the credit is not refundable (though it was refundable for the 2010 and 2011 tax years).
Saver's Tax Credit
For more than 10 years, the saver’s credit has been available to assist those who qualify and want to contribute to a retirement plan. Qualifying taxpayers include those who are at least 18 years old, who have been a full-time student during the year and who cannot be claimed as a dependent on another person’s tax return.
The saver’s credit is also subject to income limits. For 2013, eligible taxpayers include those who don’t exceed the following income totals:
- Individual taxpayers with income up to $29,500
- Married couples filing jointly with income up to $59,000
- Heads of Household with incomes up to $44,250
- Married individuals filing separately with income up to $29,500
The credit is figured based on your contributions to a traditional or Roth IRA; your 401(k), SIMPLE IRA, SARSEP, 403(b), 501(c)(18) or governmental 457(b) plan; and any voluntary after-tax employee contributions to your qualified retirement and 403(b) plans. For purposes of the credit, rollovers don't count.
The maximum credit is $1,000 ($2,000 for married couples). The credit is not refundable.
Small Business Health Care Tax Credit
The Small Business Health Care Tax Credit is the (relatively) new kid in town. Meant to make health-care coverage more affordable for small employers, the tax credit may pay up to 35 percent of health-care premiums paid for small-business employers and 25 percent of health-care premiums paid for small, tax-exempt employers in 2013 (note that the rules will change for 2014).
For purposes of the credit, a small employer is defined as a business with fewer than 25 full-time equivalent employees. To qualify for the credit, small employers must pay an average wage of less than $50,000 a year and cover at least half of their employees' health insurance premiums.
Those business that don’t owe taxes for 2013 don't lose the credit: It can be carried forward to taxable years or back to previous tax years. For tax-exempt employers who would not ordinarily owe taxes, the credit is refundable.
Read more articles on taxes.