Deductions vs. Tax Credits | Tax Tip of the Week | No. 87

Are You Getting the Credits You Deserve?Tax Deductions are good….Nonrefundable Tax Credits are better….and Refundable Credits are great!If, for example, you take a tax deduction for mortgage interest on your tax return you are simply reducing your taxable income.  This means that if your marginal tax rate is at the 25% level, you are saving $250 in taxes for every $1,000 spent on mortgage interest.A nonrefundable credit, on the other hand, is a dollar for dollar reduction in your tax liability.Examples of nonrefundable credits include:Foreign Tax CreditEducation CreditsDependent Care Expenses (Daycare)Retirement Savings CreditChild Tax CreditResidential Energy CreditCredit for Prior Year AMTGeneral Business CreditNonrefundable credits, however, are limited to your tax liability.  For example, if you have an energy credit of $1,500 and your tax liability is only $1,000, then your credit is limited to $1,000.Refundable Credits are those that result in Uncle Sam giving you money!  Examples of Refundable Credits include:Making Work Pay CreditEarned Income CreditAdditional Child Tax CreditAmerican Opportunity Credit (Education)First Time Homebuyer (expired)Fuel Tax CreditAdoption CreditHealth Coverage CreditI had a couple come see me this year that have five children, two of which are in college.  They also installed a new energy-efficient HVAC system.  Their gross income was around $75,000.  After taking advantage of one part of the American Opportunity Credit for college expenses, the Child Tax Credit for those children under age 17, and the Residential Energy Credit their tax liability was eliminated.  In addition, they received an $800 Making Work Pay Credit, $2,000 Additional Child Tax Credit and $1,000 refundable credit for the second part of the American Opportunity Credit.  So their refund consisted of all the federal tax they had withheld plus $3,800 in refundable credits.Give us a call to make sure you are getting the credits you deserve.You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.Rick Prewitt - the guy behind TTW...until next week.