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Top 10 Best Tax Credits for Tax Year 2011

Tax credits reduce income tax "dollar-for-dollar," meaning that if you receive $1,000 of tax credit, this will reduce your tax liability by $1,000. A tax deduction, by contrast, reduces income tax much more indirectly, and at a lesser rate than the dollar-for-dollar benefit provided by tax credits. To make a long story short, tax credits can be worth a lot of money!


Precisely because tax credits are so potentially valuable, it is very important to know what tax credits are available from year-to-year. Many taxpayers, especially in this age of do-it-yourself online tax preparation, miss out on valuable tax credits due to lack of knowledge about tax credits. Therefore, in hopes of saving you money this tax season, we want to give you our Pronto Income Tax list of the 10 best tax credits for tax year 2011.

Please understand that you and/or your tax professional are responsible for checking the rules for claiming each credit and following all applicable tax laws. This list offers general information and is NOT a substitute for double-checking tax credit rules on your own or with a tax pro.

1. Adoption Credit -- If you adopt a child and incur expenses in the process of adoption, you may be able to obtain the Adoption Credit to cover up to $13,360 of qualified adoption expenses per child. What's more, the law was changed for 2010 and 2011 making the Adoption Credit a fully refundable tax credit--meaning that the full amount of the credit can be paid out to you in your tax refund. Not only that, if you adopt a special needs child, you can receive the full credit even if you did not spend any money on the adoption process. The refundable federal Adoption Credit is definitely one tax credit that you should claim if you qualify. You can even "carry forward" the credit from past years. Here at Pronto Income Tax, we saw a case last year where one taxpayer received more than $30,000 worth of Adoption Credit. As a result of this credit, this gentleman received a $35,000 tax refund. After having seen this happen, we have no choice but to bestow on the Adoption Credit the best tax credit title for 2011. Also, the laws for this credit are set to change in 2012, so now is the time to claim this credit if you qualify.

2. The Earned Income Credit -- The Earned Income Credit or EIC is another fully refundable tax credit that can result in a large tax refund. If you have children on your tax return and make under $40,000, make sure to check if you qualify for Earned Income Credit. The EIC can give you up to $5,751 if you have three qualifying children and are making less than $20,000 per year. However, be careful claiming the Earned Income Credit or allowing a "shady" tax preparer to claim a large EIC for you. The Internal Revenue Service has been vigorously investigating EIC claims and even raiding the offices of tax preparers who commit EIC fraud. Here at Pronto Income Tax of California, Inc., we are well-trained in how to maximize the EIC while still following the law, offering our clients assurance that their EIC claims are correctly filed for the maximum amount of Earned Income Credit available within the bounds of the law.

3. American Opportunity Tax Credit -- The American Opportunity Tax Credit is available for taxpayers who pay for post-high school college or trade school. The AOC has a maximum of $2,500 per year for up to four years of post-high school education. You may be able to use the American Opportunity Tax Credit based not only the tuition you pay, but also the books and supplies such as a laptop computer if you attend school online. What makes this college and trade school tax credit even sweeter is that up to $1,000 of the credit may be refundable even if your tax liability is at zero for the year (as is the case for many students who may not be making too much money while they're in school). The American Opportunity Tax Credit can be worth up to $10,000 over a four-year period, if you go to a junior college or state college or affordable trade school this may cover a large portion of your school expense. Pronto Income Tax preparers are trained to watch for this credit and claim it when applicable.

4. Retirement Savings Credit -- The Retirement Savings Credit, or "Saver's Credit" for short, is one tax credit that is often missed by inexperienced or untrained tax preparers. This nifty credit is based upon the contributions that the taxpayer makes to a qualified retirement plan such as a 401K plan, a Tradition IRA, or even a Roth IRA. The Retirement Savings Credit can be worth up to 50 percent of your contribution amount, up to a maximum of $1,000 per taxpayer. If you are making less than $40,000 per year and contributing to a retirement plan, make sure to check and see if you can qualify for this credit. Receiving a $250 tax credit from the government can make it much more appealing to deposit that $500 into your retirement account. If you think you may qualify for this credit for a past year but you missed it because you did your own taxes or your tax preparer missed it, call Pronto and we will see whether you may be able to amend your tax return from the past years to claim this Retirement Savings Contributions Credit.

5. Additional Child Tax Credit -- Taxpayers with children dependents under age 17 may qualify for a tax credit of $1,000 per child; that is called the Child Tax Credit. The Additional Child Tax Credit is the refundable portion of the Child Tax Credit. So let's say that you have three kids, but your tax liability is only $300 for the year. You would "use up" the $300 of Child Tax Credit to reduce your income tax bill to zero, and then you may be eligible to receive the remaining $2,700 in the form of the Additional Child Tax Credit directly in your tax refund as a payment to you. We know, it's confusing! But it's also quite pleasing when you receive cash payments based on your children because as we all know children can be a big expense during the year. The Additional Child Tax Credit can help with those child-related costs by putting extra cash in your tax refund at a rate of up to $1,000 per child.

6. Child Tax Credit -- The Child Tax Credit, as noted above, is worth $1,000 per child. One catch is that in the year the child turns 17, even if the birthday is right on the last day of the year, there is no more Child Tax Credit for that year. Another issue that some taxpayers run into is the "phase-out" of the Child Tax Credit where, if you make over a certain amount of money, the government starts to "phase-out" or reduce your Child Tax Credit. The phase-out limits for Child Tax Credit often reduce the Child Tax Credit amount available to higher-earning taxpayers. Still, the Child Tax Credit can be a powerful income tax reducer at a rate of $1,000 per child.

7. California Dependent Exemption Credit -- For tax year 2011, the dependent exemption credit on the California tax return has been raised to $315 per dependent. This is a large increase in the credit relative to tax year 2010, when the dependent exemption credit on California was a measly $99. For taxpayers with multiple children, this increase in the California dependent exemption credit can reduce California income tax substantially in 2011.

8. Credit for Child and Dependent Care Expenses -- The nice thing about the Credit for Child and Dependent Care Expenses is that there is a credit on the federal tax return, but there is also a California credit. This gives taxpayers who pay for child or dependent care a way to "double-dip" and defray the high costs of child care by claiming two tax credits per year, one on the federal and on the state return. Note that in order to qualify for this credit, the care must be paid for in order to enable the taxpayer to work; for instance, if it is a Married Filing Jointly tax return, both spouses must have earned income or else it will be expected that the non-employed spouse can take care of the kids and there will be no Child Care Credit available. The amount of the Credit for Child and Dependent Care Expenses depends on the amount of the expense and is also based on the income of the taxpayer; there are different ratios that are used to calculate the credit depending on the taxpayer's income. In some instances, this credit can be worth upwards of $1,000 per child. Just like with Earned Income Credit, though, be careful to make sure you qualify for this tax credit—both IRS and State of California have been auditing this credit over the past few years to eliminate erroneous or fraudulent claims.

9. Foreign Tax Credit -- In our post-Millenium global economy, many taxpayers end up owning shares in foreign corporations or foreign-based U.S. companies without even knowing it. The taxpayer may receive foreign source income, for example, through a mutual fund that the taxpayer never pays any attention to because the paperwork the broker sends is so difficult to understand. The point here is this: foreign governments often have an income tax, and may apply that income tax to the foreign source income. If you paid income tax to a foreign country, you may be eligible to claim the Foreign Tax Credit based on the amount of foreign tax paid. If you don't claim this credit, you are effectively paying income tax on the same money twice: once to the foreign government and then again to the U.S. government (and, for California residents, yet again to the Franchise Tax Board of California). Here at Pronto we believe that yes it is necessary to pay your taxes, but it is NOT necessary to overpay your taxes, and that is the reason our tax preparers are trained to watch for any foreign tax paid during the year.

10. Residential Energy Efficiency Credit -- The tax credit available for energy efficient improvements to your home has been decreased for tax year 2011 relative to tax year 2010. Nevertheless, the Residential Energy Efficiency Tax Credit is still available at a rate of 30 percent of "qualified expenses" with a maximum of $500 for the taxpayer's whole lifetime (not per year, lifetime). Previously, the credit for energy efficient home improvements was 50 percent of qualified expenses with a $1,500 maximum per year. The rules for claiming and calculating the Residential Energy Efficiency Tax Credit can be complex and confusing (that's putting it mildly!), so make sure to check with your tax professional to see if you qualify. The most common "qualified expenses" to claim this credit are ENERGY STAR windows and doors, water heating systems, and certain types of insulation. To claim this credit, you must have a paper from the manufacturer showing that your chosen home improvement is "approved" to qualify you for the Residential Energy Efficiency Credit.

So, those are the top 10 income tax credits of tax year 2011 in our humble opinion!

Because there is no more "Making Work Pay Credit" or "First Time Homebuyer Credit" for tax year 2011, you may feel like there are not too many good tax credits left these days. But when you review this list you can see that there are still some nice tax credits available for those who know enough to claim them. Just make sure you qualify before claiming these credits, otherwise if you get audited, you may be forced to pay back the tax credit claimed--plus penalties and interest. A capable tax pro should be able to help you qualify appropriately.

Can you think of any great tax credits we should have mentioned but didn't? Please let us know if you have something to add in the "comments" section below, we love to hear from you.

Hopefully this list of the best tax credits will help you save money on your 2011 tax return. Please feel free to contact us here at Pronto Income Tax of California, Inc. for any of your income tax preparation or consulting needs, and we sincerely wish you all the best in 2012!