Now that you have computed your exemptions and deductions, you should subtract them from your adjusted gross income to establish the amount of your taxable income. Based on your filing status (single, married filing jointly, etc.), you can now look at your appropriate tax rate schedule and compute your total tax.
The final step in the tax maze involves tax credits and additional taxes. Once your tax credits are subtracted and additional taxes added to your total tax, you reach your tax payable, or the amount you send to the IRS.
Unlike deductions and exemptions, tax credits actually lower your tax bill by one dollar for every dollar of credit you receive. Besides the credits listed below there are several that may apply to your individual case, especially for the lower income wage earner. The most common types include:
Let's take a closer look at each.
1. Dependent care credits and Education credits
Sounds strange, but your kids can actually save you money! You may be able to take this credit if you have paid someone to care for your child under age thirteen or your dependent or spouse who could not take care for himself or herself.
The child must be your own son or daughter, grandchild, stepchild, or foster child and must be a U.S. citizen.
This credit decreases as your adjusted gross income increases.
Adoption credit
If a woman adopts a child who is under the age of eighteen, she may qualify for tax credits up to $5,000. More credits go to adoptive parents of medical or physically handicapped children.
HOPE Scholarship Credit
If you or your dependent paid expenses in 2004 for yourself, your spouse, or your dependent to enroll or attend the first two years of post-secondary education, you may be eligible for the HOPE Credit. The HOPE Credit is worth up to $1,500 per year for each student attending college.
Lifetime Learning Credit
For qualified expenses, you may eligible for the Lifetime Learning Credit. The lifetime learning credit is worth up to twenty percent of the first $10,000 in qualified tuition and related expenses for undergraduate and graduate school education for you, your spouse, or your dependents for whom you claim an exemption. Unlike the HOPE Scholarship Credit, you may claim the lifetime learning credit for an unlimited number of years. The maximum credit you can claim for 2004 is $2,000 (twenty percent of $10,000) of qualified education expenses for all students in the family. The credit is gradually reduced depending on your AGI and filing status.
2. Elderly or disabled credits
You may qualify for a tax credit if you are over sixty-five and earn a low income or you have a permanent disability preventing you from working.
3. Foreign tax credit
If you paid income tax to a foreign country, you may be eligible for this credit.
4. Child Tax Credit
If Taxpayers are claiming dependents under age 17, they may be able to claim a credit of up to $1,000, which is phased out depending on income levels.
Continue to: Part V: The Alternative Minimum Tax (AMT)
*WFN at Siebert and Muriel Siebert & Co., Inc. do not provide tax advice.
Basic Tax Concepts