Don’t confuse your credits; child tax breaks very different

There are several credits available to all eligible taxpayers.

Credits, unlike deductions, are subtracted directly from your tax and reduce your tax, dollar for dollar. All credits are either refundable or non-refundable. Refundable means you may be entitled to receive a refund if you take the credit. Nonrefundable means the credit will be used only to reduce your tax, and you will not receive any portion of the credit as a refund.

Two credits that sound alike but are very different are the Child Tax Credit and the Child Care Credit.

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The Child Tax Credit is new for 1998. You may be able to take a credit on your tax return of up to $400 for each of your children. This credit is used to reduce your tax. You will not qualify for the credit if you owe zero tax.

However, if you owe tax and have three or more children you may qualify for the credit and receive a refund based on this credit. There is a Child Tax Credit Worksheet in your 1998 income tax instructions for you to complete to determine whether you are qualified for this credit.

The Child Care Credit is actually called “Child and Dependent Care Credit.” This credit has been available for many years. You may be able to claim the credit if you pay someone to care for your dependent who is under age 13 or for your spouse or dependent who is not able to care for himself or herself. The credit can be up to 30 percent of your expenses.

To qualify, you must pay these expenses so you can work or look for work. This credit is nonrefundable, it just reduces the tax you owe.

Don’t confuse these two credits. Read the instructions carefully and use any worksheets provided in your instructions. If you still have questions, call IRS toll-free, 1-800-829-1040, and let us help you.

New college credits

Hope Scholarship Credit: Beginning Jan. 1, 1998, taxpayers may be eligible to claim a non-refundable Hope Scholarship Credit against their federal income taxes.

This credit may be claimed for the tuition and related expenses of each student in the taxpayer’s family. This includes the taxpayer, the taxpayer’s spouse, or an eligible dependent, who is enrolled at least half-time in one of the first two years of post secondary education and is enrolled in a program leading to a degree.

The amount that may be claimed as a credit is generally equal to 100 percent of the first $1,000 and 50 percent of the second $1,000 of the taxpayer’s out-of-pocket expenses for each student’s expenses. Therefore, the maximum credit a taxpayer may claim for a taxable year is $1,500 multiplied by the number of students in the family who meet the criteria above

Lifetime Learning Credit: Beginning on July 1, 1998, taxpayers may be eligible to claim a non-refundable Lifetime Learning Credit.

This credit may be claimed for the qualified tuition and related expenses of all the students in the taxpayer’s family (taxpayer, spouse, eligible dependents) who are enrolled in an eligible educational institution.

The amount that may be claimed as a credit is equal to 20 percent of the taxpayer’s first $5,000 of out-of-pocket qualified tuition and related expenses. Therefore, the maximum credit a taxpayer may claim for a taxable year is $1,000.

For details and information, please call the IRS toll-free number, 1-800-829-1040.

Provided by Department of Treasury, Internal Revenue Service.