Maximizing Credits to Reduce Taxes

There are a number of credits that can help reduce your tax bite for 2010. Unlike a deduction (which reduces your taxable income and thus provides a benefit equal only to the deduction amount times your tax rate), a tax credit is a dollar-for-dollar reduction of your tax. For some credits―such as the Earned Income Tax Credit, Child Tax Credit, Child and Dependent Care Credit, and others―there’s not much you can do to change the outcome. However, there are some credits, described below, that offer year-end tax planning opportunities.

Maximize Education Credits – If you have a child in college for whom you claim a dependent exemption and you or someone else is paying the tuition for that child, you probably qualify for either the American Opportunity Credit or the Lifetime Learning Credit. The credits begin to phase out for higher-income taxpayers whose modified adjusted gross income is $80,000 or more ($160,000 for married couples filing a joint return). 

• American Opportunity Credit - Maximum credit is obtained from $4,000 of tuition and qualified expenses that provides a credit up to $2,500 (100% of the first $2,000 and 25% of the balance). Under normal circumstances, education credits are non-refundable; that is, they offset only a taxpayer’s tax liability. However, for this credit, up to 40% can be refundable.
• Lifetime Learning Credit - Maximum credit is obtained from $10,000 of tuition and qualified expenses that provide a 20% credit up to $2,000.

 

If you have not already paid the maximum expenses for the year, it may be appropriate for you to prepay certain expenses that apply to the first quarter of 2011. The laws generally allow you to prepay tuition for an academic period that begins during the first three months of the next tax year, and then you can claim the prepaid amount for the current year’s credit. Please contact this office for additional information on this tax strategy or other issues relating to education tax benefits and credits.

Take Advantage of the Home Energy Property Tax Credit – 2010 is the final year to take advantage of the “Home Energy Property Credit” that provides a tax credit for energy-saving improvements made to a taxpayer’s principal residence. The credit is limited to $1,500 (30% of up to $5,000 of qualified expenditures) for improvements made in 2009 and 2010. So, if you claimed this credit in 2009, the most you can claim for energy property improvements for 2010 is the $1,500 maximum less any amount claimed in 2009.

 

Qualified improvements (those certified by the manufacturer to qualify for this credit), the use of which must originate with the taxpayer, must have a reasonable expected life of at least five years, and include: 

• Energy-efficient Exterior Windows and Skylights,
• Energy-efficient Exterior Doors,
• Energy-efficient Metal Roofs with appropriate pigmented coatings,
• Energy-efficient Asphalt Roofing with appropriate cooling granules, 
• Energy-efficient Heating Systems,
• Energy-efficient Air Conditioning Systems and
• Insulation Materials or Systems designed to reduce heat loss or gain.

Credit is not allowed for onsite preparation, assembly, or installation of the component. It is a non-refundable personal credit; thus, the credit can be used only to bring your tax (including the alternative minimum tax) down to zero. Any excess is not refundable and cannot be carried over to a subsequent year.

 

Pick a Hybrid or Lean-Burn Vehicle – If you are planning to purchase a new automobile before the end of the year, it might be appropriate to purchase either a hybrid or lean-burn vehicle. Credits for these types of vehicles range from $900 to $2,350. However, this credit has phased out for most manufacturers and is currently available only on qualified vehicles manufactured by General Motors, Chrysler, Nissan, Mazda, BMW, and Mercedes for hybrid vehicles, and by Volkswagen, Audi, and Mercedes for qualifying lean-burn vehicles.

 

This credit is a non-refundable personal credit, which means it can reduce your tax only to zero, and any balance is lost. However, if the vehicle is used partially for business, the portion of the credit attributable to business use becomes a general business credit, and any amount not used in 2010 carries back one year and forward for 20 years until used up.

 

If you have questions about how any of these credits will impact your specific circumstances or would like to schedule a year-end planning appointment, please call our office.