Tips To Save Your Tax Bill – Part III

Tax Credits

Having fully worked on taxable income lets now focus on various tax credits which reduces tax. In fact this element is what almost all tax planners focus on because tax credits can be easily manipulated to one’s benefit. There are various tax credits like tax credit for college expenses, for retirement saving, and for adopting children.

The maximum tax credits are for adoption and college expenses. It is not possible for everyone to adopt a child but one can always take advantage of the college expenses credit. There are broadly two types of education-related tax credits namely the hope credit and the lifetime learning credit. Students in their first two years of college can take advantage of the Hope Credit. Anyone taking college classes is eligible for the Lifetime Learning Credit irrespective of whether the classes are related to your career or not.

If you earn less than a certain amount then you are eligible for the Earned Income Credit (EIC). The EIC is credited to your account as a payment and hence often results in a tax refund even under the situation of zero total tax.

Take advantage of the stimulus programme

There are lot other temporary tax breaks that the Obama administrations has introduced to help the economy that you can take advantage of. For instance the cash for clunkers program. The program is long over however still you can avail some benefits from the program. On the purchase of one or more new cars, motorcycles or SUVs before Dec. 31 you can get the deduction on sales tax up to a total cost of $49,500. Couples and singles with adjusted gross income of above $250,000 and $125,000 respectively are eligible for this deduction.

Another tax credit introduced this year is the homebuyer credit. This credit expired on Nov. 30 however there has been an extension under which if you sign a binding contract before May 1, 2010 and settle on the home before July 1 you are still eligible for the credit. This credit has two versions-for first time house owner in the last three years there is a credit of 10% of the purchase price, up to $8,000 and for existing home owners who buy a new home there is a credit of up to a maximum of $6,500.Couples with modified adjusted gross income of maximum $225,000 and singles earning up to $125,000 are eligible for this credit. This is a refundable credit and hence reduces taxes dollar for dollar. If the credit is more than the amount of taxes paid then you get back the difference.

There is also a credit for those who are looking at refurnishing or upgrading their homes. If you go for certain energy-efficient improvements options for windows, furnaces and air conditioners, you can avail an additional 30% of the purchase price up to $1,500 as a tax credit for 2009.  You can claim the credit for 2009 by installing and making the payment for the improvement by the end of the year. In 2010 also the credit is available but in total $1,500 can be claimed over both years. Just make sure that the products that you buy are eligible for the credit. You can check that either from the manufacturer’s certification or the consumer guide at the Alliance to Save Energy Web site.

Other important tips

Always remember that except in the situation of dire necessity never go in for early withdrawals from an IRA or 401(k) retirement plan. The amount withdrawn from an IRA or 401(k) retirement plan is very much taxable and also you will have to pay additional taxes for the early withdrawal.

Also it is advisable to increase withholding so that at the end of the year the burden of taxation is considerably reduced. No doubt every month this will reduce your pay checks but at the end of year when you file your taxes you will get bigger refund.

Read more at: Tips To Save Your Tax Bill – Part II