Claiming Tax Credits

Besides taking care to claim all the tax deductions that you can, you can minimize your income tax bill by claiming all the tax credits available to you.

When they're available, tax credits are generally better for you than deductions would be, because credits are subtracted directly from your tax bill. Deductions, in contrast, are subtracted from the income on which your tax bill is based.

So, a dollar's worth of tax credit reduces your tax bill by a dollar, but a dollar's worth of deductions lowers your tax bill by 35 cents if you're in the 35 percent bracket, by 30 cents if you're in a 30 percent bracket, etc. In cases where you have a choice between claiming a credit or a deduction for a particular expense, you're generally better off claiming the credit.

As wonderful as tax credits can be, with the IRS (as you've probably figured out by now) there's almost always a catch. In this case, the catch is that tax credits are only available for certain very limited situations. Many of them apply only to certain industries (like restaurants and bars, or energy producers). And credits come with a set of very complicated rules, which you (or, more likely, your tax pro) must follow in order to claim them.