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Bankrate's 2008 Tax Guide
Filing & refund
Get it done right the first time with this advice on free filing, e-filing, documentation and refunds.
Tax credits
Tax credits, the better way to cut your tax bill

When it comes to taxes, credits are the preferred way to cut your bill.

While deductions, either itemized or standard, reduce your amount of taxable income, credits cut your actual tax bill, dollar-for-dollar. That's because credits come into play after your tax liability is figured. So if you owe Uncle Sam $500, a $250 tax credit will cut your bill in half.

Similarly, some credits are more valuable than others.

Refundable credits may eliminate any tax you owe and provide you with a refund. So even if your tax bill is zero, you could get money back from the Internal Revenue Service thanks to a refundable credit.

Refundable credits
Earned income tax credit.
Additional child tax credit.
Credit for taxes withheld on wages and other amounts.

Nonrefundable credits can take your tax down to nothing, but you can't get money back from the government.

Nonrefundable credits
Child tax credit.
Child and dependent care credit.
Credit for the elderly or disabled.
Retirement savings contributions credit.
Adoption expenses credit.
Hope and Lifetime Learning education credits.

These credits can't be used to get a refund on your tax return. When your tax bill reaches zero, any leftover credit amount is wasted. With the adoption credit, however, you can carry forward unused amounts from year to year until the credit is absorbed or the carry-forward period expires, whichever is first. Watch: "Filing taxes - software vs. accountant"

Your choice of tax return also could affect your credit claims. The earned income credit is the only one that can be taken by Form 1040EZ filers. To get the benefit of the other credits, you must use Form 1040 or Form 1040A, and some of these credits require you to fill out additional forms.

-- Updated: Feb. 6, 2008
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