The first two installments of this series defined deductions and credits, and looked at non-refundable tax credits. And with what we’ve covered so far, it’s easy to see how thoughtful planning, self-improvement and a good accountant can reduce – or even eliminate – your tax bill.
Today, let’s take a closer look at refundable tax credits.
In Part 2, we saw how non-refundable tax credits reduce your tax bill, but they don’t give back any extra.
The best kind of credit is the refundable tax credit. It reduces your tax bill, AND increases your tax check. For example, if you have a tax bill of $1,000, and a refundable tax credit of $1,500 – you get a $500 check from our now dear Uncle Sam.
Here are three refundable tax credits you can take advantage of:
- 1st Time Homebuyers Tax Credit
Get this one while it lasts. It has two periods. The first period ran from April 9, 2008 until December 31, 2008. It offered a $7,500 interest free loan from Uncle Sam. This credit is for 10% of the purchase price of your home purchase (up to $7,500). The credit is repaid over a 15 year period, with repayment beginning in the second year after receipt of the credit.
The new Stimulus Plan added another period from January 1, 2009 until December 31, 2009, changed the plan from a loan to a gift and increased the limit to $8,000.
That’s right, Uncle Sam is giving away up to $8,000 to first time home buyers. The credit is still 10% of the purchase price and is phased out for incomes over $75,000 ($150,000 if married).
And there’s a bonus: a first time homebuyer is anyone who has not owned a home in the last three years – it doesn’t really mean your first home purchase.
- Recovery Rebate Credit
If you missed the 2008 stimulus check, you might be in luck. The Recovery Rebate Credit may be available if you fall into one of these categories:
ü You gained an additional qualifying child in 2008
ü Someone claimed you as a dependent in 2007, but you will file independently for 2008. My daughter Arielle was a dependent college student for 2007; now she is working and will not be a dependent for 2008.This means my “Baby” girl gets an additional $300 for this credit (Do you think she will pass some back to Dad?).
ü You didn’t have a valid Social Security Number in 2007, but got it in 2008.
- Earned Income Tax Credit (EITC)
This much maligned credit may come in handy this year if you saw a substantial drop in income, or your income was up to $ 41,646 for a couple filing jointly with two children. This credit can be for as much as $4,828 with two eligible children. . EITC is based on income and dependents and is the most widely used IRS credit. Just don’t run out and “rent” some kids to get it! That’s the reason this credit is maligned.
This wraps up our series on tax deductions and credits.
We’d love to hear how this series has helped you, and to answer any questions you might have. Be sure to drop us a line to let us know what you think.