Some deductions have corresponding credits, and vice versa, leaving people confused about which to claim. (Education is one of those areas). In almost all cases, the credit is the optimal route. "The quick and dirty rule of thumb is that if you take the amount of the deduction and multiply it by your tax rate, that gives you roughly the credit equivalent," explains Erb. So, if the credit amount is greater, which it usually is, that's the one to take.
The true key to maximizing credits is simply to educate yourself on what's out there and how to claim them. "People miss out on credits because they don't know about them or realize that they qualify for them," says Erb. Many credits are income-based, and designed to ease the costs of child care and higher education.
"Education credits can be very overlooked," says Kathy Hettick, first vice president for the National Society of Accountants. "Make sure that you understand the credits and are keeping track of the educational expenses and tuition you're paying." One prime way to maximize the education credits is to accelerate payment of tuition and other related expenses in the current year. That way, you'll have more to claim and can enjoy the credit at a higher level come tax time.
Since circumstances change from year to year, it's also worth revisiting credit and deduction opportunities regularly to see what you qualify for, particularly if you've gotten married, had a baby, moved or your income level has dropped. Contrary to popular belief, seeking the assistance of a tax professional can help people of all financial persuasions. "Tax planning isn't just something you do if you're in a high income tax bracket," says Erb. "If you make $20,000 a year your AGI is lower, so you only have to pay $2,000 in medical expenses to qualify for that credit."
The bottom line of maximizing tax return potential? Keep meticulous records and educate yourself or enlist the assistance of someone who's well-versed in the tax arena. What have you got to lose? Certainly not money!
- Erb, Kelly Phillips. Tax attorney. Telephone interview Nov. 17, 2014.
- Erb, Kelly Phillips. "IRS Announces 2015 Tax Brackets, Standard Deduction Amounts and More." Forbes. Oct. 30, 2014 (Dec. 2, 2014) http://www.forbes.com/sites/kellyphillipserb/2014/10/30/irs-announces-2015-tax-brackets-standard-deduction-amounts-and-more/
- Hettick, Kathy EA. First Vice President, National Society of Accountants. Telephone interview Nov. 17, 2014.
- Hustad, Karis. "Tax filing in 2014: 7 new rules and 9 wacky deductions." Christian Science Monitor. Jan. 28, 2014 (Nov. 17, 2014) http://www.csmonitor.com/Business/2014/0128/Tax-filing-in-2014-7-new-rules-and-9-wacky-deductions/Energy-efficient-home-improvements-can-mean-tax-credit
- IRS. "Deducting Business Expenses." 2014 (Nov. 16, 2014) http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Deducting-Business-Expenses
- IRS. "Do I qualify for EITC?" 2014 (Nov. 16, 2014) http://www.irs.gov/Individuals/Do-I-Qualify-for-EITC%3F
- IRS. "Plan Now to Get the Full Benefit of Saver's Credit." Dec. 13, 2012 (Nov. 16, 2014) http://www.irs.gov/uac/Newsroom/Plan-Now-to-Get-Full-Benefit-of-Saver's-Credit;-Tax-Credit-Helps-Low-and-Moderate-Income-Workers-Save-for-Retirement
- IRS. "Publication 936: Main Content." 2014 (Nov. 18, 2014) http://www.irs.gov/publications/p936/ar02.html
- IRS. "Tax Topics: Itemized Deductions." 2014 (Nov. 18, 2014) http://www.irs.gov/taxtopics/tc500.html
- IRS. "Topic 456: Student loan interest deduction." 2014 (Nov. 17, 2014) http://www.irs.gov/taxtopics/tc456.html
- IRS. "Topic 502: Medical and Dental Expenses." 2014 (Nov. 18, 2014) http://www.irs.gov/taxtopics/tc502.html
- IRS. "Topic 506: Charitable Contributions." 2014 (Nov. 17, 2014) http://www.irs.gov/taxtopics/tc506.html
- IRS. "Topic 602: Child and Dependent Care Credit." 2014 (Nov. 17, 2014) http://www.irs.gov/taxtopics/tc602.html
- IRS. "Topic 607: Adoption Credit and Adoption Assistance Program." 2014 (Nov. 17, 2014) http://www.irs.gov/taxtopics/tc607.html
- Palmer, Kimberly. "11 Ways to Save On Your Taxes This Year." U.S. News and World Report. March 12, 2014 (Nov. 16, 2014) http://money.usnews.com/money/personal-finance/articles/2014/03/12/11-ways-to-save-on-your-taxes-this-year
- Rosen, Elizabeth. "An Overview of Tax Deductions." U.S. Tax Center. Dec. 30, 2013 (Nov. 18, 2014) http://www.irs.com/articles/overview-tax-deductions
- Wood, Robert W. "Strange But Legit Tax Deductions." Forbes. March 9, 2012 (Nov. 18, 2014) http://www.forbes.com/sites/robertwood/2012/03/19/strange-but-legit-tax-deductions/