Make it a practice to take advantage of every tax credit and deduction available to you. Credits provide a dollar-for-dollar reduction in income tax liability; that is, a $1,000 credit actually saves you $1,000 in taxes.
Deductions, on the other hand, lower your taxable income. For example, if you are in the 25% tax bracket, a $1,000 deduction saves you $250 in tax, which is $750 less than the savings with a $1,000 tax credit.
Parents with dependent children under age 17 are entitled to claim a tax credit of up to $1,000 through 2016. The child tax credit is refundable to the extent of 15% of an individual’s earned income in excess of $3,000. The threshold amount for determining whether a taxpayer is eligible for the refundable (or additional) child tax credit is permanently set at $3,000 (not indexed for inflation). That amount has been the threshold since 2009. The bill also precludes retroactive claims of the child tax credit by preventing taxpayers from amending a return (or filing an original return) for any prior year in which the taxpayer or the qualifying child did not have an individual taxpayer identification number (ITIN) in order to claim the credit. The bill adds a provision prohibiting individuals from claiming the credit for 10 years if they fraudulently claimed the credit and for two years if they are found to have claimed the credit with reckless or intentional disregard of the rules.
Those who adopt a child can receive a tax credit of up to $13,460 in 2016. Those adopting a child with special needs may claim a $13,460 tax credit in the year the adoption is completed, even if they do not have qualified adoption expenses.
Both of these credits are subject to phase out depending on your income level. To see if you qualify, click here.