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Who Gets To Claim Your Exemption?

  • Most Overlooked credits: Earned Income Tax

The Earned Income Credit (EIC) is a tax credit for certain people who work and have earned income below a specific amount. This credit may give you a refund even if you do not owe any tax. In order to claim this credit, you must file an income tax return and qualify by meeting certain rules.

A Credit Can Be As Much As:

$412 for earned income or adjusted gross income (AGI) less than $12,590 (if you are single) and no children $14,590 if married filing jointly)

1. $4200 for earned income or AGI less than $33,241 and one qualifying child ($35,241 if married filing jointly)
2. $4,536 for earned income or AGI less than $37,783 and more than one qualifying child $39,783 if married filing jointly)  investment income can not be more than $2900,00 

Rules For All Filers For EIC:

  • AGI must be less than the above mentioned limits
  • You must have a valid social security number
  • Your filing status cannot be married filing separately
  • You must be a U.S. Citizen or resident alien all year
  • You cannot file Form 2555 or Form 2555-EZ (relating to foreign income)
  • Your investment income must be $2,800 or less
  • You must have earned income

Additional Rules If You Have Qualifying Children:

  • Your child must meet the relationship, age, and residency test
  • Your qualifying child cannot be used by more than one person to claim the EIC
  • You cannot be a qualifying child of another person

Additional Rules If You Don't Have Qualifying Children:

  • You must be at least age 25,but under age 65
  • You cannot be the dependent of another person
  • You cannot be a qualifying child of another person
  • You must have lived in the United States for more than half the year
  • QUALIFYING CHILD: A qualifying child is a child who is:
  • Your son, daughter, adopted child (placed for legal adoption), stepchild or a descendant of any of them (for example: your grandchild) or
  • Your brother, sister, stepbrother, stepsister, or a descendant of any of them (for example: your niece or nephew), who you cared for as your own child or
  • Your foster child (any child placed with you by an authorized placement agency or by judgment, decree, or other order of any court.)
  • and the child was, at the end of the current tax year, under age 19 or under age 24 and a student or permanently and totally disabled at any time during the year, regardless of age
  • and the child lived with you in the United States for more than half of the tax year.

Earned Income For Purposes Of Earned Income Credit Includes:

  • Wages, salaries and tips
  • Gross income received as a statutory employee
  • Taxable long-term disability benefits received before minimum retirement age
  • Net earnings from self-employment
  • Nontaxable combat pay election. You can elect to include nontaxable combat pay in earned income for the purpose of figuring the earned income credit.  

Most Common Mistakes When Applying For The Earned Income Credit:

  • Claiming a child who is not a qualifying child.
  • Filing single when you are married.
  • Under estimating or over estimating your income.
  • Using incorrect social security numbers

Child Tax Credit:

The amount of the child credit is phased out at higher income levels. The phase-out begins when adjusted gross income (AGI) passes $110,000 on a joint return, $55,000 if you're married filing separately, and $75,000 for all other filing statuses. For every $1,000 (or fraction of $1,000) your AGI exceeds the trigger point, you lose $50 of credit. For example, if you file a joint return and your AGI is $115,000, the $5,000 over the threshold would reduce your credit by $250. So if you had just one dependent child in 2006, your credit would be just $750. If you have three children who qualify, though, your credits would be worth $2,750 ($3,000 minus $250).

If your child tax credit is more than your tax, you may get a refund of some of your credit. The refundable part of the credit is called the additional child tax credit. You may be eligible for the additional child tax credit if:

1. Your taxable earned income is more than $11,300 (for 2006), or
2. You have three or more eligible children and the social security and Medicare tax you paid is more than your earned income credit

Additional Tax Credit:

Additional Child Tax Credit

If you have at least one dependent child under age 17, your tax is zero and your earned income (wages, salaries, and self-employment income) is more than $11,300, you may be eligible to claim the additional child tax credit. Complete Form 8812.

Hope Credit:

Cut down on your college cost on thee first and second-year college with the Hope Tax Credit.

With the many expenses families face today, saving for college sometimes slips down the priority list. The Hope credit can help cushion the financial blow of higher education for each qualifying student in the first two years of college or vocational school. For 2006, the Hope credit maximum limit has increased to $1,650 ($3,300 for Gulf Opportunity Zone students).

Am I Eligible?:

If your dependent child plans to attend college, you may use the Hope credit if he or she is:

1. Enrolled in one of the first two years of post-secondary education - generally the freshman and sophomore years of college;
2. Enrolled in a program that leads to a degree, certificate or other recognized educational credential;
3. Taking at least one-half the normal Full-time workload for his or her study course during at least one 2006 academic period;
4. Free of felony convictions for the procession or sale of illegal substance at the end of 2006; and
5. Did not have expenses that were used to figure a Hope credit in more than one previous tax year.

Income is also a factor in Hope credit eligibility. You cannot claim the credit if your AGI is $55,000 or more ($110,000 or more in the case of a joint return). Taxpayers who file as married filing separately cannot take advantage of the credit.

How Much Can The Hope Credit Help Me?:

As an eligible individual, you may claim the Hope credit for 100 percent of the first $1,100 ($2,200 for Gulf Opportunity Zone students) and 50 percent of the next $1,100 ($2,200 for Gulf Opportunity Zone students) of qualified expenses, which include tuition, fees and required books. Because this is a per-student limit, not a per-return limit, the maximum Hope credit you may claim for 2006 is $1,650 times the number of eligible students claimed on your tax return.

Using The Credit Wisely:

The Hope credit is nonrefundable, so if your credit exceeds your tax, the difference isn't refunded to you. On the other hand, the credit can also be used for prepaid expenses, such as tuition paid in December for January classes. This feature may be especially useful for students whose tuition fees fluctuate from semester to semester.

Multiple Student Households:

If you and other qualifying individuals are all planning to take classes, the Hope credit and the life time learning credit can be used together. And although you can't claim both credits for the same expenses - or even the same student - you can claim a Hope credit for each qualifying student and a lifetime learning credit for a different student's qualifying expenses. The cost of education has never been higher, but with careful planning the Hope credit can help.

Lifetime Learning Credit:

Headed back to school? The Lifetime Learning Credit may pick up a portion of your tab.

Today, people change careers more than ever to stay on top of the ever-changing job market. If you're among the growing number of non-traditional students picking up a class at your local college, here's some reassuring news - the lifetime learning credit may help offset your expenses.

Furthering your career and changing technologies often require even experienced professionals to polish their skills and update their knowledge. And not everyone in their early 20s will find that their first career sustains them for the next 40 or 50 years.

How Can A Lifetime Learning Credit Help Me?:

Unlike the Hope credit, which can be claimed only during a student's first two academic years, you may claim the lifetime learning credit for qualifying courses at the undergraduate, graduate, or professional level. Whether you attend an eligible institution on a full- or part-time basis, the credit is 20 percent of the first $10,000 (up to $2,000; $4,000 for Gulf Opportunity Zone students) you pay for eligible students in your family. You may use the credit on a yearly basis, and it can be applied even to prepaid expenses for the school year ahead.

Who Qualifies?:

While the lifetime learning credit is flexible, it also has some restrictions. If you're single, the credit is phased out as your Adjusted Gross Income (AGI) reaches $45,000 and completely disappears at $55,000. If you're married and file jointly, the AGI phase-out range lies between $90,000 and $110,000. Taxpayers who file using the married filing separately status cannot take advantage of this credit.

Special Circumstances:

If you and other qualifying individuals took classes in 2006, bear in mind that Hope Credit and the Lifetime Learning Credit cannot be used for the same student. However, you can claim a Hope credit for each qualifying student and a lifetime learning credit for a different student's qualifying expenses.

Another factor to consider: If you are claiming a Lifetime Learning Credit for both GO Zone students and other students, the qualified expenses for the other students can't exceed $10,000 reduced by the qualified education expenses of the GO Zone students. See IRS Form 8863, Education Credits, and Publication 970, Tax Benefits for Education, for more information.

Adoption Credit:

If you are planning on adopting a child or have done so this year, you can get tax credit for adoption expenses. Find out how.

Adopting a child is such an exciting event and lengthy process - especially when it's time to bring your new son or daughter home and the process can also be expensive. There are a couple ways to counter those expenses. First, check with your employer about assistance, because some companies offer a program to recoup a portion of adoption expenses. Also, come tax time you may be able to take advantage of an adoption tax credit of up $10,960 of your expenses. The adoption credit is not available for any reimbursed expense, but certain amounts reimbursed by your employer for qualifying adoption expenses may be excludable from your gross income.

Savers Tax Credit:

Yet another reason to invest in an IRA, the Saver's Credit could give you a tax break simply for saving your money.

If you qualify for the Retirement Savings Contribution Credit, known as the Saver's Credit, you can get a credit for up to half of what you contribute to your IRA or other eligible retirement plan. A quick reminder: a tax "credit" means you reduce your tax liability dollar for dollar, versus a "deduction," which reduces your income subject to tax.

Up to $1,000 (if single) and ($2.000 if filing jointly) of your annual contribution is eligible for the Saver's Credit. Eligibility depends on your filing status and adjusted gross income (AGI). For this purpose AGI includes excluded foreign income. Your credit rate can be as low as 10 percent or as high as 50 percent, depending on your AGI. The lower your income, the higher the credit rate; your credit rate also depends on your filing status. These two factors will determine the maximum credit you may be allowed to take.

Those eligible for a credit of 50 percent of their contributions are joint filers with up to $30,000 AGI, head of household filers with up to $22,500 AGI, and other filers with no more than $15,000 AGI.

You are not eligible for the Saver's Credit if you file a joint return and have an AGI of more than $50,000. The same goes for head of household filers whose AGI is more than $37,500, and other filers who have AGIs of more than $25,000. For more AGI details, refer to Saver's Credit Eligibility.

The Saver's Credit creates yet another reason to invest in an IRA.

If you haven't started an IRA yet (and millions of people haven't) or made a contribution to your already established IRA or retirement plan this year, don't fret - there's still time. You have until April 17, 2008, to contribute to a retirement plan.

Energy Credits:

  • Energy Tax Incentives Act of 2005
  • Tax Relief and Health Care Act
  • Hybrid Vehicle Tax Credit
  • Tax Breaks of Higher Education