Tax Tips 2010 - Deductions & Costs

Tax deductions and credits are two options available for tax payers who are looking to reduce their tax liability. Both have the same end result by allowing people to pay less in taxes. Tax credits are a type of rebate, and tax deductions lower a taxpayer's taxable income.

• Tax deductions reduce the amount of taxes owed by lowering a taxpayer's taxable income. The IRS has specified a list of expenses upon which a taxpayer should not pay taxes. Examples of these expenses include student loan interest, educational expenses, medical costs, and home office expenses. Taxpayers maintain records of their expenses and can subtract these expenses from their annual earnings. In this way, deductions lower a person or household's taxable income. Many taxpayers are eligible for a tax refund through tax deductions. In general, deductions remain the same, year after year.
• Tax credits are analogous to rebates from the government. People who meet a set of criteria are eligible to receive credits for which they are eligible. In general, tax credits vary each year based on economic conditions. The federal government may implement a tax credit system as a means to stimulate the economy. In the past, tax credits have been available for people who purchase a new car. People have also received credits based on income level. No matter the reason, if you qualify for a $500 credit, the government will subtract $500 from your tax liability. You will either owe less or receive a refund.

Make sure that you have a thorough understanding of the tax credits available for 2010. You may be able to save a substantial amount of money.

Tax Credits for 2010

As part of the Tax Relief Act of 2010, the federal government has implemented and expanded several tax policies. Check to see whether you are eligible for the following credits when you file your tax returns for 2010:

• First-time Homebuyer Credit: The terms for this tax credit expanded for 2010. Homebuyers can receive a credit for up to $8,000 with no requirement to repay the credit. In the past, the homebuyer credit was an interest-free loan, but for 2010, it is a true credit. To be eligible, you must have signed a contract to buy the home by April 30, 2010 and closed on the sale by Sept. 30.You also may not have owned a home in the United States in the past three years.
• Existing Homeowner Credit: This credit is similar to the first-time homebuyer credit, and has the same guidelines. However, you may only receive a tax credit of up to $6,500. You must also have lived in the same principal residence for any five-consecutive-year period during the past eight years.
• Payroll Tax Credit: In 2010, Congress gave workers a credit of 6.2 percent of their earned income, capped at $400 for single filers and $800 for joint filers. This will not be received as a rebate check. Rather, it was received via a lower tax withholding from each paycheck.
• Tax Credit for College Tuition: Replacing the Hope credit through 2012, the American Opportunity Tax Credit provides a credit of up to $2,500 per student per year for four years of college. It now also covers the cost of books, and it begins to phase out at $80,000 of Adjusted Gross Income for single filers and $160,000 for joint filers. If the credit is more than your income tax liability, then 40 percent of it is refundable. Also, the full credit is allowed against the Alternative Minimum Tax.
• Child Tax Credit: If the credit exceeds the filer's tax liability, then all or part of the credit will be refunded if the filer earns more than $3,000 in 2010. This is down from $12,550 in earnings from previous years.
• Earned Income Tax Credit (EITC): For 2010, the maximum EITC rises by $628.50 for families with three or more children. The phaseout of the credit for joint filers starts at higher income levels in 2010, so more can claim the credit. There is also an option to include nontaxable combat pay in the calculation of earned income for the EITC in 2010.
• Credit for Residential Energy-Efficient Property: This credit is for 30 percent of the cost of installing solar water heating equipment, solar electric equipment, geothermal heat pumps or small wind turbines in your primary residence or a second home, and is unlimited in 2010. The credit for fuel cell property cannot exceed $500 per half-kilowatt capacity.
• Credit for Energy-Saving Home Improvements: The tax credit for the cost of energy-saving home improvements is 30 percent for 2010, up to a combined maximum of $1,500 in 2009 and 2010. It applies to qualified insulation, windows, outside doors, biomass fuel stoves and high-efficiency furnaces, water heaters and central air conditioners.
• Refundable Child Tax Credit: To qualify to claim the child tax credit if it exceeds your regular income tax bill, the income threshold needed is $3,000.