How Do I Practically Reduce My Tax Liability?Part 2

Credits are an important Social Policy, Economic Stimulus Policy, and most importantly, a wealth building opportunity for those who appropriate the credit(s). This article continues the series in Practical Steps to Reduce Your Tax Liability, Legitimately.

span style="font-weight: bold;">Credits:
A credit does exactly what the name implies: It is a credit against the tax that you will owe. People stumble over the application of this concept, but think of it this way: A deduction of $1 to a person in the 30% bracket is really only worth 30 cents in saved taxes. A credit of $1 pays $1 of tax owed. Ergo, credits are much more valuable than deductions.

When Congress is Most Serious About Stimulus, Out Roll the Credits!
Congress gives credits to accentuate the need being addressed, and when they wish to be absolutely sure of the outcome. Sometimes credits may be carried back, to past tax liability, obtaining refunds for taxes paid previously. Other times they can only be used currently or prospectively, but they pay the tax due, $1 for $1. Sometimes a credit may be transferred among business groups, or utilized through consolidation or merger. Credits are an important tax code social policy because credits get results.

Our social policies are very transparent when one considers the application of the credit concept.

Examples:
* Earned income credit. If you don't make a certain amount of income we consider to be the minimum, you actually receive a tax credit. It is a device to help the lower forty percent of all wage earners. It works to level the playing field.
* Excess social security tax paid in.
* Child and Dependent Care Credit, applied to children and adults.
* Credit for getting older or becoming disabled.
* Cashing out of certain tax exempt bond funded mortgages
* Targeted Jobs Tax Credit ( commonly called a work opportunity credit.
* Welfare to work credit ( normally over a two year period)
* Research and Development tax credit
* Orphan Drug Credit
* Adoption Credit
* Hope Scholarship Credit
* Life Time learning credit
* Child Tax Credit
* A Credit for buying a home in a particular area
* Targeted Historic Redevelopment Credits
* Targeted City Redevelopment Districts.
* Alternative fuel credits

When Congress wants instant action, the tax credits get rolled out or current credits get increased. There are other stimuli that are powerful, but nothing spurs direct action like direct tax credits.

A person that wants to build wealth should always ask, " Are there any tax credits available to these activities or ventures?" Sometimes the tax credit allows a party to be more competitive providing the same service in the same fashion as a competitor. Therefore the credit is flowing to the bottom line, or in some cases reducing the business investment risk dramatically.

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As an example, suppose you have obtained a contract to assemble parts into working lawn mowers for a manufacturer. Suppose further that you will need some twenty new employees to meet the requirements of your five year contract. If I locate this business in a certain targeted zone, I will receive a tax credit for every new employee I hire and train. I could select another location, but by investigating, I determine that this program will put many tens of thousands of dollars of tax credits in my pocket, which in effect, reduces my labor cost, and makes me more profitable. Amazingly, one location could be across the street from the target zone, I could hire all the same people, and not receive the benefit. It pays to pay attention.

Next Article: Above the Line Deductions

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