How 5 common tax credits can reduce your tax bill this year. Get the Money Girl book at http://MoneyGirlBook.com
Money Girl
346 MG How to Pay Less in Taxes (Part 1)
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For more money tips that are not in the weekly podcast, be sure to sign up for the free Money Girl newsletter at quickandertietips.com. When you consider how you'd like to spend your hard-earned paycheck, paying taxes probably doesn't come to mind. But did you know that they're probably your largest expense next to housing? Since taxes take such a big bite out of your income, it's smart to cut them every way possible. This is the first episode in a two-part series about how to legally pay less taxes and save more money. I'm sure you've heard the saying, "In this world, nothing is certain except death and taxes." Benjamin Franklin is credited for that famous phrase. I've often wondered what he'd think about all the many dozens of taxes we have to pay these days. There's federal income tax, state tax, sales tax, gasoline tax, capital gains tax, estate tax, gift tax, food tax, alcohol tax, property tax and business tax, just to name a few. Taxes are baked into just about every financial transaction, no matter if you're earning or spending money. Of course, you should never do anything illegal to avoid paying taxes. But there's nothing wrong with making sure that you don't overpay. Even the IRS encourages taxpayers not to pay more in taxes than the law requires. So what's the big secret to paying less tax? Well, it's simple. Claim every tax deduction and tax credit that you're eligible for. Deductions and credits can reduce the total amount of income tax you have to pay. Here's the difference between the two. Tax deductions reduce the amount of your income that's subject to tax. For instance, if you contribute $2,000 to a traditional retirement account, you generally are allowed to deduct that amount from your income. In other words, if your gross income is $50,000, having a $2,000 deduction means that you're only taxed on $48,000. That would save about $500 in federal taxes for a single filer in 2013. On the other hand, tax credits are even more powerful because they reduce the actual amount of tax you have to pay. For instance, if you're a single filer in 2013 with gross income of $50,000, you pay about $8,000 in taxes. However, if you qualify for a $2,000 tax credit, you only have to pay $6,000. So a tax deduction reduces how much taxable income you can claim. A tax credit reduces how much tax you owe $4. In other words, having a $2,000 tax credit actually saves you $2,000. While having a $2,000 tax deduction only saves you a percentage of that amount based on your effective tax rate. Get your holidays started with the perfect tree and your perfect style from the Home Depot. Whether you want something that you can assemble in a few clicks, steal the show with over 2,000 dollar changing bulbs, or a tree with lights that can be controlled by remote or foot pedal. The Home Depot has it all in our huge assortment of premium trees. 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I think the positive feedback that Ixcel gives is really crucial when it comes to learning. So make an impact on your child's learning. Get Ixcel now and money girl listeners can get an exclusive 20% off Ixcel membership when they sign up today at ixl.com/moneygirl. Visit ixl.com/moneygirl to get the most effective learning program out there at the best price. Is it time to re-imagine your future? The right business skills may make a difference in your career. At Capella University, we offer a relevant education that's designed to focus on what you need to know in the business world. We'll teach professional skills to help you pursue your goals, like business management, strategic planning, and effective communication, and you can apply these skills right away. A different future is closer than you think, with Capella University. Learn more at Capella.edu. Tax credits are even refundable, which means they can reduce your taxes below zero and allow you to get a tax refund. In this episode, we'll cover five common tax credits that you might qualify for in 2013 and 2014. Then, in part two of this series, you'll learn how to take advantage of every possible tax deduction for your situation. Tax credit number one. The savers tax credit. This is an incentive to save for retirement. It repays you as much as $1,000 or $2,000 if you're married filing jointly when you save for the future, which is a really nice benefit. This credit is available for low and moderate income workers and those who are self-employed who contribute to a retirement account, such as an IRA or a workplace plan, like a 401K or 403(b). To claim the savers tax credit, you can't be a dependent on someone else's tax return. You can't be younger than 18 or be a full-time student. While the deadline for funding workplace retirement plans is generally December 31, there's more time with an IRA. You have until tax day, which is typically April 15, to add money to a new or existing IRA for the prior tax year. To find out how much the savers tax credit could put in your wallet, take a look at the IRS chart or follow instructions on Form 8880. Of course, I'll include links to these resources in the transcript for this show on the money girl page at quickanddirtytips.com. Tax credit #2. The American Opportunity Tax Credit. This helps you pay for college expenses, such as tuition, fees and books. It's worth up to $2,500 per eligible student for the first four years of higher education. Tax credit helps low and moderate income students who are pursuing a degree and are enrolled in school at least half time. You can't double up and also claim another type of education credit, nor can you have a felony drug conviction to be eligible for it. To find out if you can claim the American Opportunity Tax Credit, use the IRS Education Calculator or follow instructions on Form 8863. Tax credit #3. The Earned Income Tax Credit. This was created to help low income working individuals and families manage the burden of taxes. In general, if you earn less than about $51,000, this tax credit can give you a substantial tax refund. The IRS has a calculator called the EITC Assistant. It's in English and Spanish to help you find out if you qualify. They also have tax credit calculators for prior years, so if you find out that you were previously eligible for this credit but didn't claim it, you can file an amended return. To correct a tax return, you must file Form 1040x within three years after the due date of your original tax return. Tax credit #4. The Child and Dependent Care Credit. This helps you pay someone to care for those who depend on you so you can work or look for work. It could be a child under the age of 13, a disabled spouse, or an older person who lives with you. This credit is worth up to 35% of your qualifying care expenses depending on your income. When figuring your credit, you can claim up to $3,000 of costs for one qualifying dependent or up to $6,000 if you have two or more. To claim the Child and Dependent Care Credit, complete Form 2441. Tax credit #5. The Child Tax Credit. This helps families pay for the cost of supporting children. It's worth as much as $1,000 per qualifying dependent depending on your income. To claim a child, he or she must be younger than 17 and have lived with you for more than half of the tax year. To learn more, or to claim the Child Tax Credit, use Schedule 8812 on Form 1040. I know taxes are not the most fun or fascinating financial topic. Even Albert Einstein said, "The hardest thing in the world to understand is the income tax." But no matter what we think of them, taxes are here to stay. So join me next week for Part 2 of this series when I'll give you a simple way to make sure you never miss a money-saving tax deduction. I'm glad you're listening to CHING. That's all for now. Courtesy of Money Girl. Your guide to a richer life. A Capella University learning the right skills could make a difference. That's why our business programs teach you relevant skills you can take from the course room to the workplace. A different future is closer than you think with Capella University. Learn more at Capella.edu. When you need meal time inspiration, it's worth shopping king's supers for thousands of appetizing ingredients that inspire countless mouth-watering meals. And no matter what tasty choice you make, you'll enjoy our everyday low prices, plus extra ways to save, like digital coupons worth over $600 each week, and up to $1 off per gallon at the pump with points, so you can get big flavors and big savings, king supers, fresh for everyone, fuel restrictions apply. [BLANK_AUDIO]