In our last article, we looked at
the difference between credits and deductions and showed why
credits are better.

We also promised to tell you about nonrefundable
tax credits. These credits are useful, but they’re not the best. Stick
around for our last article in this series on refundable tax credits that show
you how to really put some of Uncle Sam’s money in your pocket.

Tax credits are targeted to
activities that the government wants us to invest in. For example, to cut
reliance on foreign oil or save energy in our homes, there is an energy tax
credit.

As a reminder, tax credits offer a
dollar for dollar reduction of your tax bill. If you have a $500 tax credit, it
reduces your tax bill by $500. So, if you owed $500, now you owe nothing. Of
course, if you owe $100 – you still just owe nothing. That’s why these are
called non-refundable tax credits.

They help you pay your tax bill,
but stop short of putting money in your pocket.

Let’s look at some of the best non-refundable
tax credits out there.

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Savers
Tax Credit

We like to call
this the “double whammy” tax credit. For one action you get two benefits. The
first benefit is you’re putting money in a retirement plan for your future, and
it grows tax-free (it is only taxed when you take it out).

The other benefit
is you get a $1,000 tax credit ($2,000 if married filing jointly). You get this
credit if you participate in your company’s retirement plan.

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Educational
Tax Credit

The ETC is handy
in homes where higher education is practiced. Any family member can take
this non-refundable tax credit. It is for education beyond high school.

The ETC is
highest in the first two years after high school (called the HOPE credit) – up
to $1,800 ($3,600 if you live in the 2008 Midwest Disaster Area) per student.

The Lifetime
credit is for higher education beyond the first two years. This credit has a
limit of $2,000 ($4,000 if you live in the 2008 Midwest Disaster Area) per
return.

The ETC has another
special option: you can take it as either
a credit or as a deduction. You choose the option that brings the greater tax
benefit to you. This tax credit is based on the cost of tuition and books only.
Living expenses (room and board) are excluded.

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Child Tax
Credit (CTC)

The CTC is a
sweet offering just for having kids. It is $1,000 for each child under 17 that
is your child, step-child, foster child, sibling, step sibling or any
descendent of these relatives.

The CTC is a non-refundable
tax credit. However, if you are unable to take the full CTC, there is an
Additional Child Tax Credit (ACTC) which is refundable.

Here’s the best
way to look at it: if you use the CTC to zero out your tax bill, the ACTC kicks
in to increase your refund. Finally, a way to get paid for the kids! But
remember only for children under 17.

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Dependent
Care Tax Credit (DCTC)

In today’s two
working parent families, the DCTC allows a credit for amounts paid for child
care. To take this credit, the name, address and Tax Identification Number
(Social Security Number or Federal Tax ID Number) is required.

This credit is applied
based on income. For example, income up to $15,000 gets a 35% of dependent care
expense tax credit. In this example, if the day care expense was $1,500, the
credit would be $525.

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Adoption
Tax Credit

This is a nice
credit if you would like to adopt a child (excluding step-children). It also
has an exclusion attached to it that could bring the total write-off to
$23,300.

The credit alone
is worth up to $11,650 and reduces your tax bill. Eligible expenses are: travel
(including meals and lodging), adoption fees, attorney fees, and court costs.
The adoption can be for a domestic or foreign child.

The exclusion
amount for adoptions is also $11,650. This is how much your employer (or
company) can reimburse you without it becoming income to you.

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Energy
Tax Credit

This credit
promotes efficient energy use in our homes and cars. Home improvements like
replacement windows, insulation, tank-less water heaters, exterior doors, and
certain high efficiency heating and air conditioning (HVAC) units qualify for
this credit.

The credit is
worth 10% of the cost and can go up to $1,500.

In addition,
major energy changes like installing solar electric or water heaters is worth
30% of the cost up to $2,000 as a tax credit.

Finally
purchasing a hybrid car from certain dealers (excluding Toyota and Honda) can bring a tax credit worth
$450 up to $3,000. Buy a plug-in hybrid electric car, and the credit can run up
to $7,500.

Each of these tax
credits is separate from the others so they can be added together on one
return. If you are planning on home improvements this year, purchasing a new
car, or considering energy efficiency upgrades, your choices can save you thousands.

This is just a taste of what tax
credits can do for you.

Be sure to read part three of this
series. You’ll discover how simple it is to have Uncle Sam putting money INTO
your pocket. Now that’s icing on the cake.