Five Common Tax Credits Explained

Tax credits are popular ways to reduce your overall tax burden. Credits are dollar for dollar reductions in the amount of tax due, so it's a pretty big bang for your buck. Here are five of the most common tax credits:

1. Credit for Child and Dependent Care Expenses. The credit for child and dependent care expenses can be fairly significant, depending on the amount that you paid and your income level. The credit is equal to a percentage of the expenses you actually paid for child care less any reimbursements from any program or social services agency. The credit starts at 35% of expenses if your adjusted gross income is less than $15,000 and phases out to 20% of expenses if your adjusted gross income is more than $43,000. The maximum credit available is $3,000 for one qualifying child and $6,000 for two or more qualifying children.

If you have out-of-home child care at a qualifying child care center, the center must meet federal and state requirements and have a total enrollment of at least six children. To claim the credit, you report the amount paid, together with the tax ID number of the child care center, on your tax return using a federal form 2441.