When it comes to reducing your tax burden, earning and applying tax credits can save you more money than if you only take advantage of tax deductions. Because credits are subtracted from your total tax debt, they can significantly reduce what you owe to Uncle Sam. Read on to learn about three tax credits you might not have heard about that can save you a bundle on your IRS bill.
Solar Energy Tax Credits
There are many good reasons to convert your home to solar power; for many, the chief motivation for making the change is the positive environmental impact that comes from switching to a clean, planet-friendly energy source. Another big plus is knowing you’ll save on the cost of powering your home. But did you know that there is a major tax credit available if you install a solar energy system in your home?
The Investment Tax Credit was established in 2005, and although it was initially set to expire in 2007 it has proven to be so popular that it has been extended multiple times. With the ITC, if you buy solar panels for your home you’ll be rewarded with a tax credit equal to a percentage of the cost of your system. By acting before the credit’s next expiration date, at least 22 percent of the entire cost of your system can be subtracted from your tax bill. In the event that the taxes you owe are less than the value of your credit, you can roll over the remaining credit into future years. This is a tremendous incentive to go solar; you’ll save money each and every month and receive a big break on your taxes. Just be sure to act quickly before the ITC expires permanently.
There are two notable federal tax credits available to offset the cost of higher education. The first, the American Opportunity Tax Credit, allows tax-paying college students, or their parents, to reduce the expense of a post-secondary education for the first four years. Up to $2,500 in credit per student can be claimed for expenditures such as tuition, books, supplies and equipment. In general, any student pursuing a degree who is enrolled at least half-time is eligible as long as income requirements are met.
Similar to the AOTC, the Lifetime Learning Credit is also available to help students pay for education after high school. In the case of the LLC, individuals need not be pursuing a degree in order to receive the credit. This means even people taking classes for job training may qualify. The LLC offers a maximum credit of $2,000 toward educational expenses, and like the AOTC there are income requirements. Although you can’t double dip and earn both credits, it’s important to remember that either will reduce your bottom-line tax bill and are well worth looking into.
Retirement Contributions Credits
Another tax credit to be aware of is the Saver’s Credit, formerly known as the Retirement Savings Contributions Credit. It’s designed to assist low- and moderate-income individuals in saving for retirement. Depending on your income and your tax status, you could be eligible for a tax credit of up to 50 percent of the first $2,000 each year that you contribute to an eligible retirement account. That means that as much as $1,000 of what you’ve invested in your future can be deducted dollar-for-dollar from your tax bill. By contributing to a retirement account and taking advantage of this credit, you’re not just helping to build a nest egg for when you stop working, you’re also saving money on a major annual expense each year.
Saving money is important to just about everyone, and if you can reduce a major expense like your income tax bill then so much the better. By looking into your eligibility for these three tax credits, as well dozens of other credits and deductions that are available, you can go a long way toward cutting or even eliminating your federal tax debt.