Bankrate's 2009 Tax Guide
Filing & refunds
taxes
Why tax credits are better

As you have likely surmised, most tax credits are nonrefundable. The major, and most popular, credits in this category are the following:

  • Child tax credit, which can be claimed by parents of young children.
  • Child and dependent care credit, available to working parents.
  • Credit for the elderly or disabled, which provides tax savings to folks age 65 or older or to disabled taxpayers of any age.
  • Retirement savings contributions credit, which encourages individuals to build their nest eggs.
  • Adoption credit, offering additional tax help when you add to your family.
  • Hope and Lifetime Learning credits, to help taxpayers and their families further their educations.

Only three permanent credits offer you the chance at a refund, as follows:

  • Earned income tax credit, created for lower-income workers.
  • Additional child tax credit, which some taxpayers can file for after claiming the basic child tax credit.
  • Credit for taxes withheld on wages and other amounts, which helps employees recover Social Security withholding amounts that exceeded the statutory limit.

These are just a few of the more popular tax credits. Every year, federal lawmakers find room in the tax code for a few more credits. These usually are limited to very specific situations, such as the purchase of an alternative-fuel vehicle, and tend to be temporary.

But it's worth the time and effort to take a look at your tax form -- the long Form 1040 gives you the most complete picture of available tax breaks -- to see if a credit might help reduce your tax bill.

Tax credit limits
While claiming credits generally is the wiser tax move, even they have their limits.

Many credits are reduced or even unavailable for taxpayers who earn over certain income thresholds. Some of these limits are set by statute; others are adjusted periodically for inflation.

In many cases, age and filing status also are a factor in a taxpayer's ability to claim a credit.

Because the IRS frowns on double-dipping, you must be careful to coordinate your tax credit claims with other possible tax benefits.

If you believe a tax credit could be useful, be sure to double-check its eligibility parameters. In some cases, such as with the earned income tax credit, the IRS Web site offers interactive programs to help you determine your tax-break eligibility.

One final note about credits. Although you tend to see them paired off against deductions when the value of each is discussed, the use of these tax breaks is not an either/or situation.

You can claim every available tax deduction for which you qualify and also utilize as many tax credits for which you're eligible. The combination of the two is a great way to get your tax bill to its lowest possible level.

This is an excerpt from Kay Bell's new book, "The Truth About Paying Fewer Taxes," reprinted with permission from FT Press.

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