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July 19, 2012 | Posted By: Barbara Martinez | Categorized in: Finance, FatWallet, Family, Tax Advice & Tips
Make Life Better and Your Wallet Fatter with Tax CreditsThe tax code is one of the lengthiest documents produced annually, and it is extremely difficult to follow for anyone not educated in the nuances of legal text. Not unlike the Protestant Reformers' efforts to translate the Latin Bible into popular languages, many software developers have created programs to guide people through the filing process. Some filers are even eligible to deduct the cost of hiring a professional for tax preparation.
Even with expansion of filing options, the IRS finds some credits are only utilized by a fraction of filers eligible for them. This is a shame because unlike deductions, credits directly reduce your amount owed. Learning about these tax credits available for 2012 can protect you from costly mistakes. Each of the following three credits will provide savings on tax day and long-lasting benefits.
Energy Credits for Money-saving Upgrades
Two types of home upgrades provide eligibility for tax credits. Home modifications like insulation, fans, and double-pane windows are eligible for a credit worth ten percent of the cost. The lifetime maximum is $500. Purchase of certain appliances can earn you a credit worth 30 percent of the cost. This includes geothermal HVAC systems, solar water heaters, and small wind turbines. There is no dollar limit to this credit, which is slated to end after 2016.
Residential energy credits are available at any income. If you have already used the maximum for home modifications, be sure to investigate your state and municipality for further credits.
Education Credits to Increase Earnings Potential
Furthering your education is still a solid investment. Higher education is expensive, but smart choices can dramatically increase your lifetime earning potential. There are two credits available for 2012, and each has rules for eligibility.
The Lifetime Learning Credit is non-refundable and worth a maximum of $2,000 per year. It only covers tuition and fees. The maximum credit begins phasing out at $102,000 to $122,000 for joint filers and $51,000 to $61,000 for singles.
In contrast, the American Opportunity Credit covers course materials, tuition, and college fees. Up to $2,500 per year can be claimed for each student with a lifetime maximum of four years. Up to $1,000 of the credit is refundable for single filers earning less than $80,000 and joint filers at less than $160,000.
Immediate Benefits for Retirement Savings
Getting a head start on retirement savings is difficult to do with more pressing needs, but there is a credit to make it worth your efforts. The catch here is low income limits. Phase out for the credit goes from $17,125 to $28,250 for singles and up to $56,500 for joint filers.
Assume a $2,000 investment into a retirement savings account. The total investment reduces your taxable income and 50 percent of the investment is counted as credit. The IRS found fewer than 12 percent of eligible Americans claimed this credit in 2011.
It is important to think about taxes before the year's end, or you may miss out on great deals. Investigate the many ways to reduce your tax burden while helping yourself get ahead.
Barbara Martinez is a freelance writer who blogs about taxes and how to get the best tax breaks. Find out how much you can save on your taxes with this Calculator.
Photo Credit: Enter The Story on Flickr