Tax credits help you to reduce your taxable income. The more credits and deductions you qualify for, the less you will pay in taxes. At the same time, it is important to claim only those credits and deductions you qualify for. When processing returns, the IRS removes credits and deductions that you do not qualify for, which could cause you to owe more taxes. Be sure to check eligibility requirements before claiming tax breaks on your return.
Here are the top tax credits that can substantially reduce your taxable income, thereby lowering your taxes.
Earned Income Tax Credit (EITC)
The Earned Income Tax Credit was established in 1975 and can only be claimed by those who are between 25 and 65 years of age. Individuals, married spouses and those with children can claim this credit. Married filing separately, however, cannot claim the EITC.
Eligibility and the amount of credit that can be claimed depend upon the adjusted gross income, earned income and investment income. The self-employed can also claim the EITC.
The 2014 EITC income limits:
To claim EITC, your earned income and adjusted gross income (AGI) must each be less than:
$46,997 ($52,427 married filing jointly) with three or more qualifying children
$43,756 ($49,186 married filing jointly) with two qualifying children
$38,511 ($43,941 married filing jointly) with one qualifying child
$14,590 ($20,020 married filing jointly) with no qualifying children
American Opportunity Tax Credit (AOTC)
The AOTC is a major credit for higher education students that will expire after 2017. You can get full credit if your modified adjusted gross income is $80,000 or less. For married filing jointly, the limit is $160,000. As compared to the Lifetime Learning Credit, the income limits of AOTC are higher.
Under AOTC, you can claim a maximum credit of $2,500 per eligible student annually. If after claiming this credit you total tax amount comes to zero, then the 40 percent of any remaining amount of the credit (up to $1,000) can be refunded to you.
Child and Dependent Care Credit
The Child and Dependent Care Credit helps taxpayers reduce the cost of babysitting or daycare. If you hired help to care for your child or dependent so that you and your spouse can work or actively look for work, then you can claim this credit.
Married filing separately cannot claim this credit. The credit amount is a percentage of the work-related expenses you paid to a care provider for the care of a qualifying individual. The percentage depends on your adjusted gross income. The total expenses to calculate the expenses must not exceed $3,000 for qualifying individuals and $6,000 for two or more qualifying individuals.