Tax Reduction And Management Techniques - Tax Credits

Tax Credits
Tax credits are direct deductions that reduce the amount of tax liability dollar-for-dollar. Credits are better than normal deductions because they are considered "below the line" subtractions taken directly from the actual tax liability. There are over 17 tax credits currently allowed under the tax code. For study purposes, of those most likely to appear on the exam, we will focus our energy on the five credits listed below:

Children Tax Credit
The current tax law provides an annual tax credit of $1,000 for each qualifying child of the taxpayer that is under age 17 at the end of the tax year, and claimed as a dependent of the tax filer. Qualification for this credit requires filling a Form 2441 with a regular 1040 or 1040A income tax form.

Phase out of the credit applies if your modified adjusted gross income (MAGI) exceeds the following levels:


Single filer
$75,000
Married, joint filer
$110,000
Married, separate filer
$55,000
Head of Household
$75,000
Qualifying widow/widower
$75,000

Adoption Expenses Tax Credit
A tax credit of up to $13,170 may be available (2010 figure) on your return if you incurred qualifying costs of adopting a child under age 18, or a person deemed to be mentally or physically incapable of their own care. In order to claim this, you are required to fill Form 8839: qualified adoption expenses.


Phase out of the credit applied if your MAGI is between $182,520 and $222,520 (2010 figures).

Dependent Care Tax Credit
This credit is allowed for reimbursement of expenses to hire a caretaker for a dependent child or other individual while you're at work full or part-time. The credit is available provided that you have earnings from employment.


Limits: Maximum to $3,000 for one dependent, or $6,000 for two or more dependents.
Depending on adjusted gross income (AGI), a credit percentage between 20 to 35% of AGI is used to determine each taxpayer's maximum credit.

These amounts must be reduced if the taxpayer receives an employer dependent care plan.

Phase out for the credit:
AGI over $15,000 up to $43,000: whereas, the 35% credit is reduced 1% for every $2,000 of AGI up to $43,000. At $43,000 AGI + the credit is fixed at 20%.

American Opportunity (Hope) Tax Credit
This credit is available for students in the first four years of college or other post-secondary education. Up to $2,500 can be claimed for qualified tuition and fees paid per student (credit is claimed on Form 8863).

Qualifications:

  1. No felony conviction for possession or distribution of controlled substances;
  2. Program enrollment must work towards a degree, certificate or other recognized credential;
  3. Enrolled in one of the first four years of post-secondary education and
  4. Taking at least half of the normal workload for your program of study.

Phase out for the credit:

  • MAGI range of $90,000 (single filers)
  • MAGI range of $180,000 (married filing jointly)

Lifetime Learning Credit
The lifetime learning credit is available for the taxpayer, spouse and their dependents to cover up to a $2,000 maximum of total qualified education expenses. The credit is not per student, it's only good for one credit per tax return. The credit is calculated on 20% of the first $10,000 of qualified expenses, and up to a maximum of $2,000 (20% x $10,000). This credit can be claimed by filing parts II and IV of Form 8863.

*The same student can only claim either the Lifetime Learning Credit or American Opportunity Credit in the same year.*

  • The American Opportunity Credit is more advantageous, because it can be used for multiple students.

Phase out for the credit:

  • MAGI between $60,000 (single, head of household, widow)
  • MAGI between $120,000 (joint return)

Earned Income Credit
This credit is designed to encourage individuals that are economically disadvantaged to join the workforce. Individuals with or without children, can qualify for the credit depending on the amount of their earned income or family income for the given tax year.

Phase out for the credit:
AGI $7,500 - $13,460 – no children (single, head of household, widow, widower)
AGI $16,450 - $43,352 – with children (single, head of household, widow, widower)
AGI $12,500 - $18,470 – no children (married filing jointly)
AGI $21,500 - $48,632 – with children (married filing jointly)

Accelerated Deductions
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