Can You Qualify for a Tax Credit?

Looking for ways to reduce your 2011 taxes? See if you’ll be able to qualify for any tax credits. Credits are available for a variety of expenses.

Child and dependent care. If you pay for the care of a child under age 13, a disabled spouse, or another adult dependent while you work, look into claiming this credit. It’s available for 20% (or more) of up to $3,000 of qualifying expenses ($6,000 for two or more dependents).

Higher education.

The American Opportunity Tax Credit can be as much as $2,500 annually (per student) for the payment of tuition and related expenses for the first four years of college. A different credit — known as the Lifetime Learning Credit — is available for undergraduate or graduate tuition and for job training courses (maximum credit of $2,000 per tax return). You’re not allowed to claim both credits for the same student’s expenses, and both credits are subject to income-based phaseouts.

Excess Social Security tax.

This credit is easy to miss. If you work for two or more employers and your combined wages total more than the Social Security taxable wage base ($106,800 in 2011), too much Social Security tax will be withheld from your pay. You can claim the excess as a credit against your income tax.

Energy-saving home improvements.

There are two credits available to homeowners. The first, potentially worth up to $500, is available for a range of energy-efficient equipment and improvements to a principal residence. Another 30% credit is available for the installation of solar electric and hot water systems, geothermal heat pumps, and small wind turbines (principal or second residence) and fuel cell systems (principal residence only). Various requirements and limitations apply.

Adoption.

A credit of up to $13,360 is available for the payment of qualified expenses, such as adoption fees, attorney fees, and court costs. The credit is phased out at certain income levels, and there are certain restrictions as to the tax year in which the credit is available.

Alternative minimum tax (AMT)

If you paid the AMT last year, you may be able to take a credit for at least some of the AMT you paid. The credit is available only for AMT paid with respect to certain “deferral preference” items, such as the adjustment required when incentive stock options are exercised.

These are just some of the tax credits available to individual taxpayers. There are a range of business tax credits as well. At tax time, be sure to ask us about tax credits.

How Long?

It can pay to keep an eye on the calendar when you’re thinking about selling an appreciated investment. Your capital gain will be taxed at a maximum rate of 15% (for 2011 and 2012) if you’ve held the investment for more than one year (long term).

Example

An investor bought 1,000 shares of stock 11½ months ago for $30,000, and they’re now worth $50,000. If he sells the shares now, his $20,000 capital gain will be taxed at an ordinary rate as high as 35% — a tax of as much as $7,000. But, if he continues to hold the shares until the more-than-one-year holding period has passed, and he sells them for the same $50,000, his tax on the $20,000 gain will be a maximum of $3,000 (15%). By waiting, the investor could save $4,000 of tax.

Of course, by holding an investment, you risk a price decline. So don’t let tax ­considerations override your better judgment.