Few people like to pay federal income taxes. We work hard all year long, and many of us end up giving a large chunk of our earnings to the Internal Revenue Service (IRS). However, you can take advantage of numerous individual tax credits. These credits can lower the amount of taxes owed to the IRS.

There are several tax credits in the federal tax code. However, it's not always easy to figure out if you're allowed to take a credit. If you improperly take credits, the IRS can make you pay fines and penalties. It's in your best interest to know about the tax credits you can take and how they work.

How Do Tax Credits Work?

Tax credits are very different from tax deductions. Deductions lower your taxable income. Tax credits, on the other hand, lower the amount of taxes you owe. Dollar for dollar, credits can be more valuable than deductions.

Tax credits are either "refundable" or "nonrefundable." With a refundable tax credit, you'll get a refund in the amount of any difference between the amount of the credit and the taxes you owe. With a nonrefundable credit, you can only lower the taxes you owe. Once you hit zero, you can't take any more credits.

Many of the credits depend on whether you have a qualifying child. For example, a qualifying child for the Child Tax Credit is a child who:

  • Is your son, daughter, stepchild, brother or sister, stepbrother or stepsister, grandchild, niece or nephew
  • Is claimed as a dependent by you
  • Lived with you for more than half of the year
  • Was under 17 years old at the end of the year
  • Didn't provide over half of his own support for the year
  • Is a US citizen, a US national or a US resident alien

Common Tax Credits

There are several individual or "personal" tax credits in the federal income tax code. Some of the most common credits include the Earned Income Tax Credit (EITC), the Child Tax Credit and the Child and Dependent Care Credit.

The EITC is a refundable credit for individuals and families in the low to middle income range. It's based upon your income. The IRS has a helpful EITC Assistant that can help you determine if you qualify for this credit. You have to satisfy several requirements to be eligible for the credit. These requirements include:

  • You must have earned income from some type of work or employment. It doesn't include money you make from investments
  • If you're married, you must file jointly. Except in very limited circumstances, you can't file separately
  • You can't be a qualifying child of another person
  • If you don't have a qualifying child, you must be between 25 and 65 years old, live in the US for more than half the year and not qualify as a dependent of another person

The Child Tax Credit is a refundable credit that's designed to help individuals and families who have children. The credit is $1,000 for each qualifying child. The amount is lowered depending upon your adjusted gross income (AGI). If the amount of credit is more than the taxes you owe, you generally can claim an "additional tax credit" and possibly get a refund.

The Child and Dependent Care Credit is a nonrefundable credit for money you pay for the care of a "qualifying" person so you can work. A "qualifying" person includes:

  • A qualifying child under 13 years old who is your dependent
  • A spouse who is physically or mentally incapable of caring for herself or himself
  • Any person unable to take care of herself or himself who is your dependent and lived with you for more than half the year

Other Tax Credits

You might qualify for other tax credits. Some examples of these credits include:

Questions for Your Attorney

  • I didn't take the EITC credit last year even thought I was eligible for it. Is there anything I can do?
  • My husband and I are getting divorced. Which of us can take the Child Care Credit?
  • I'm getting audited by the IRS because I took the EITC for the last 3 years when I wasn't supposed to. Do I need a lawyer for the audit?