Direct, dollar-for-dollar reduction in tax liability, as distinguished from a Tax Deduction, which reduces taxes only by the percentage of a taxpayer's Tax Bracket. (A taxpayer in the 33% tax bracket would get a 33-cent benefit from each $1 deduction, for example.) In the case of a tax credit, a taxpayer owing $10,000 in tax would owe $9,000 if he took advantage of a $1,000 tax credit.
Under certain conditions, tax credits are allowed for:
1. Taxpayers over age 65 with adjusted gross incomes of less than $17,500 for a single or head of household, or $25,000 or less for married couples filing jointly.
2. Earned income credit for married couples filing jointly with one child and income of less than $32,338, those with income of less than $36,456 and more than one child, and $13,490 for married couples with no children.
3. Child tax credit of $1,000 per child for those whose modified adjusted gross income is $110,000 or less for married couples filing jointly, or $75,000 for singles or heads of household.
4. People with disabilities, as proven by the fact that they are receiving disability income.
5. Income tax paid to a foreign country (known as the foreign tax credit).
6. Child care expenses up to $3,000 for one child or $6,000 for more than one child.
7. Costs of adopting a child (up to $10,630).
8. A mortgage interest credit intended to help lower-income people afford home ownership.
9. A retirement savings contributions credit of up to $1,000 for a single person and $2,000 for a married couple filing jointly for making contributions to retirement plans with adjusted gross income of less than $25,000 for a single and $50,000 for a couple.
10. The Hope Scholarship Credit, which can offset college tuition and related educational expenses for the first two years of post-secondary education, up to a maximum of $1,500, taken on Form 8863. This credit is available for those with modified adjusted gross income of less than $43,000 for singles and $87,000 for married couples filing jointly. The credit is phased out for incomes between $43,000 and $53,000 for singles and between $87,000 and $107,000 for couples.
11. The Lifetime Learning Credit, which applies to tuition costs for undergraduates, graduates, and those improving their skills through a training program. The credit is worth up to 20% of up to $10,000 of qualified expenses, or $2,000 paid for qualified tuition and related expenses. The income limitations for the Lifetime Learning Credit are the same as those for the Hope Scholarship Credit.
12. Electric vehicle credit of 10% of the cost of the car up to $4,000. Other credits are available for buying a fuel cell car, an advanced lean burn technology car, a hybrid car, and an alternative fuel motor vehicle.
13. Energy efficient property. Including solar panels (up to $2,000), solar water heaters (up to $2,000), and fuel cells (up to $500 for each 0.5 kilowatt of capacity).
14. Health coverage credit of 65% of the premiums paid for health insurance for those who receive a pension benefit from the Pension Benefit Guaranty Corporation or Trade Adjustment Assistance.
Businesses also qualify for various tax credits including:
1. Making business investments.
2. Rehabilitation of historic properties.
3. Conducting research and development.
4. Providing low-income housing.
5. Providing jobs for economically disadvantaged people (the work opportunity credit and welfare-to-work credit).
6. Starting up a pension plan for small employers.
