5 Tax Credits You Can't Afford to Miss

Tax laws
Cassandra Hubbart, DailyFinance
Everyone knows that tax deductions are great, but many people don't realize that tax credits are even better.
By cutting your tax bill dollar-for-dollar rather than just reducing your taxable income, tax credits are a can't-miss way to pay less to the IRS. Here are five tax credits you need to be aware of.

1. Earned Income Tax Credit.
The earned income tax credit is designed to help low- and moderate-income workers. In order to qualify, you have to earn money from a job or through self-employment, and your total income has to fall within certain limits based on your filing status and the number of qualifying children you have. The provisions of the credit are fairly complex, but the size of the credit is worth the effort, with maximum potential payouts of nearly $5,900 for those with three or more children. Best of all, unlike most tax credits, you can actually get a refund check if the amount of the earned income tax credit is more than your tax liability. Get more information from the IRS about the earned income tax credit here.

2. Child Tax Credit.
The Child Tax Credit allows you to reduce your tax liability by up to $1,000 for each child in your family under the age of 17. An income phaseout begins at $75,000 for single filers and $110,000 for joint filers that can reduce the credit you claim. To qualify, you have to meet a number of tests, including providing more than half of the child's support, claiming the child as a dependent on your tax return, and having the child live with you more than half the year. Find out more about the child tax credit on the IRS website here.

3. Child and Dependent Care Credit.
Those with children under age 13 can claim a portion of what they pay for child-care expenses, including daycare or babysitting. The key, though, is that the care provided has to enable you to work, and for joint filers, both spouses must have earned income from work in order to claim the credit. The percentage of expenses you can claim as a credit depends on your income, with a minimum credit of 20 percent and a maximum of 35 percent. The maximum amount of expenses you can claim is $3,000 for one child or $6,000 for two or more children, translating to a maximum credit amount of $2,100. Get more information from the IRS about the child and dependent care credit here.

4. Adoption Credit.
If you adopted a child, you can take up to $12,650 in related expenses as a tax credit. Taxpayers earning more than about $190,000 start to face a phase-out of the credit, which covers attorney fees, travel and meals, court costs, and other adoption-related fees. The credit used to be refundable, meaning that you could get a refund check if your taxes weren't high enough to use up the whole credit amount. But starting last year, you can only use the credit to offset existing tax liability. With somewhat complicated rules on the timing of when you can take the credit, you'll want to be sure to check out the IRS website for more information on the adoption credit.

5. Retirement Savings Contributions Credit.
Some taxpayers can get as much as a 50 percent credit on contributions they make to IRAs and other retirement-savings vehicles. The credit applies to up to $2,000 of retirement contributions for each spouse, and the credit ranges from 10 percent to 50 percent based on filing status and your income. In general, single filers making up to $28,750 and joint filers with incomes as much as $57,500 can get at least some money back on this tax credit, helping to offset what you set aside for your retirement. Learn more from the IRS about the retirement savings contributions credit here.

Get the Credit You Deserve
The benefits that tax credits provide can be huge, so be sure not to miss out on taking any credits that you're entitled to. There's no better way to reduce your tax liability and get a bigger refund check back from Uncle Sam.

Crazy tax deductions
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5 Tax Credits You Can't Afford to Miss

Who knew sweating profusely could get you out of paying taxes?

Tom Walpole, a CPA from Rochester, N.Y., had a client who successfully wrote off the more than $10,000 he paid for central air conditioning in his home and cottage.

He claimed they were medical expenses, since he had a condition involving excessive sweating that made it necessary for him to have air conditioning.

He attached a doctor's prescription to his tax return stating that the loss of fluids from sweating could potentially pose a health threat, and the IRS let it through.

Even nose jobs can be deductible -- as long as you need your nose for work.

A wine store and wine bar owner from California was able to successfully write off his nose job as a business expense last year because he was having problems smelling.

He claimed the surgery was medically necessary for his job, given the several buying trips he took to Europe each year where he needed to be able to smell properly to pick out the best wines.

His tax preparer, enrolled agent Bonnie Lee, deemed it a necessary business expense but told him to get a note from his doctor detailing the smelling condition and prescribing the nose job in case the IRS decided to sniff around.

Because she chose to work at a private Catholic school rather than a public school, a teacher from New York figured she could write off the nearly $20,000 difference in salary as a charitable contribution.

It made sense to her, since she was willing to work for less money in order to help her church.

But her tax preparer, Jeff Gentner, an enrolled agent from Williamsville, N.Y, had to be the bearer of bad news.

"I told her it's redemption versus reduction -- the heavenly rewards will be there, but I can't do anything about the refund," he said.

Just because it's a little racy doesn't mean it can't be considered a valid deduction.

Vincent Porter, a CPA from Arlington, Texas, found that out this year when a client wanted to write off $200 worth of sex toys.

The client, an exotic dancer, was able to deduct the cost of a few vibrators, lubricant and lingerie as business expenses because she used them for her webcam work.

"If a roofer can deduct the cost of his tools used in his line of work, then an 'actress' may deduct her 'tools' used to generate revenue as well," Porter said. "As long as she was not doing anything illegal, then we could support the deduction."

No one wants your used underwear and socks, and the IRS sure doesn't want to see a charitable deduction for them either.

On several occasions, clients have submitted long lists of charitable donations, including many pairs of used underwear and socks they had given to organizations like Goodwill, said Bernadette Schopfer, director of taxation at Maier Markey & Justic LLP.

And if they try to value the underwear and socks at a couple dollars a pair, that can really add up.

"Things are always worth more to the person donating," said Schopfer. "Sometimes you have to step back and say, 'Is somebody really going to use this?' And chances are, they don't want your old underwear."

After a long night of drinking with clients, a business owner got thrown in jail for getting tangled up in a bar fight.

He subsequently attempted to deduct all the drink and dinner expenses from the night -- along with the bail he paid to get out of jail and the cab fare to get back to work the next day.

He was ultimately able to deduct the meal and drink expenses -- and even the taxi fare, because they were work-related. But the more than $10,000 in bail money was a no-go, said Dominique Molina, president of the American Institute of Certified Tax Coaches.


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