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Top 5 Tax Credits to Reduce your Tax Bill

Tax credits lower your taxable income, thereby helping you to pay less in taxes. Even if you cannot afford to hire a tax preparer or prefer to do your taxes yourself, you may qualify for any of the top five tax credits, explained below.
taxes in retirement1. Earned Income Tax Credit

The Earned Income Tax Credit (EITC) is a refundable tax credit for low-income taxpayers. A refundable tax credit means that even if you do not owe any taxes, you can still receive a refund by filing your return. To qualify for the EITC, you must be 25 years old or younger than 65 years.

The amount of credit you receive is determined by your income and the number of dependents. The IRS considers your adjusted gross income, earned income, and income from investments to determine your eligibility. To claim the EITC, you cannot use the filing status of married filing separately.

2. American Opportunity Tax Credit

This tax credit is for students who are undertaking higher education. Eligible students can deduct qualified education expenses such as tuition fees and other expenses for the first four years of higher education. The maximum credit allowed annually is $2,500 per eligible student.

If you do not owe any taxes, you can have 40% of any remaining amount of the credit refunded to you. The maximum amount that can be refunded is $1,000.

If your adjusted gross income is $80,000 or less (or $160,000 or less for married filing jointly), you can receive the full credit.

3. Child and Dependent Care Credit

If you are a working parent using babysitting services, or you’re looking for work while leaving a dependent with a paid care service, then you can claim the Child and Dependent Care Credit if:

  • The dependent child is under 13 years of age,
  • Your spouse who is physically or mentally incapable of self-care and has lived with you for more than half the year, or
  • A person who is physically or mentally incapable of self-care, and has lived with you for more than half the year.

If a dependent is claimed on another’s tax return, then you cannot claim him or her on your return. For the care of one dependent, the dollar limit of the credit is $3,000.

4. Saver’s Credit

This tax credit is for low and moderate income taxpayers. If your adjusted gross income is not more than $30,000 ($45,000 if head of household; $60,000 if married filing jointly), you can claim this credit. This credit encourages taxpayers to save for retirement.

The lower your income, the higher the credit amount you receive. For 2015, the maximum amount that you could receive using this credit is $30,500 as a single filer, $45,750 for heads of household, and $61,000 as a joint filer or married filing jointly.

You must be at least 18 years old and not a full-time student to take advantage of this credit.

5. Adoption Credit

This is a non-refundable tax credit that can be used by parents of qualified adopted children. Using this credit, parents can deduct certain adoption expenses that they incurred to adopt the child. The credit can be used in case of the adoption of a child with special needs even if there were no qualified expenses.

The credit reduces if your modified adjusted gross income (MAGI) is between $197,880 and $237,880. You cannot claim this credit if your MAGI is above $237,880.