Tax-preparation software has done wonderful things to reduce the aggravation of income-tax filing, and to reduce the most common mistakes made by taxpayers, which are math errors.
However, those fill-in-the-blank programs don't always do a great job when it comes to capturing uncommon tax credits and tax savings that might be available with a few last-minute adjustments.
The same goes for some of the tax forms available for people with uncomplicated returns. The simplified federal 1040-EZ form, for example, does not allow for claiming certain valuable credits.
So even when using some of the time-saving tax products that are available, it's good to have a basic knowledge of some of the tax credits you wouldn't want to overlook. A tax credit is worth far more than a tax deduction, because a credit is a dollar-for-dollar reduction in the tax owed.
Here are some of those easy-to-miss credits:
If you sent a dependent child under 13 to day camp in 2013 so that you could work, you could get at least 27 percent of the cost back through state and federal tax credits, no matter how much money you make.
You can't claim the Child and Dependent Care credit on the federal 1040-EZ form, so if you normally use that simplified form, you could be unaware of the tax credit. The federal tax credit is worth 20 percent to 40 percent of eligible expenses, based on income, while the corresponding state credit is 7 percent for most filers. To learn more, go to irs.gov and look up Publication 503.
The "excess insurance premium tax credit" detailed in last week's column is worth up to $1,250 on South Carolina income-tax returns, if the cost of insuring your home exceeded 5 percent of your adjusted gross income. If your tax preparation software does not include S.C. Form 1040-TC (other nonrefundable tax credits) and Schedule TC-44, you could easily overlook this one, and I've spoken to people who missed out for just that reason.
The federal Retirement Savings Contributions Credit, or "Saver's Credit" is a valuable incentive for people with moderate to low incomes, and it's another credit that can't be claimed on the 1040-EZ. You'll need the IRS Form 8880.
The Saver's Credit is worth between 10 percent and 50 percent of the amount contributed to retirement plans during the tax year, up to $2,000 per taxpayer, based on income. A married couple filing a joint return could have an adjusted gross income of up to $59,000 and be eligible for at least a 10 percent tax credit, which would be worth $400 if both contributed $2,000 or more to retirement plans.
A single mother (head of household) could earn up to $26,625 and still get the maximum 50 percent tax credit. In other words, contribute $1,000 to a retirement plan such as an Individual Retirement Account or 401k, and get $500 back.
Another thing forms and software aren't good at doing is pointing out how small adjustments could mean big tax savings.
The Saver's Credit is a great example, because the income limits fall right around the midpoint of what families actually earn.
So, say there's a married couple, and both spouses contributed to retirement plans in 2013. If their adjusted gross income was $59,500, they made too much to get the Saver's Credit. However, if they were to contribute $500 to a tax-deductible IRA for 2013, which can be done until taxes are due in 2014, that would reduce their income below the threshold and make them eligible for a tax credit up to $400.
And for those eligible for South Carolina's excess insurance premium tax credit, any reduction in federal adjusted gross income would also increase the size of that credit, so long as it didn't exceed the maximum credit.
Tax rules are complicated and can be a quick route to a painful headache, but knowing some of the particulars can help you gain advantages that you might miss otherwise.
Reach David Slade at 937-5552 or email@example.com