How do I maximize benefit of tax credits?

Question

Looking at my 1040 from 2006, I can see that my total credits (line 56) nearly equaled the tax I owed (line 46). Based on what the form says, and what is in p970 "The lifetime learning credit is a nonrefundable credit. This means that it can reduce your tax to zero, but if the credit is more than your tax the excess will not be refunded to you." I can expect to "lose" money if the credits ever exceeded the tax I owed. Having said that, I expect that the two values will be nearly equal again this year. Little has changed for me (income is up a bit, filing status is the same, number of exemptions is the same, itemized deductions will be about the same, etc.). However, should something happen between now and the end of the year (E.g. loss of employment), which drastically lowered my AGI, I was wondering if I could delay the claim of my Lifetime learning credit for 2007 until my income climbed again (I.e. 2008, 2009)? If not, are there any other strategies I could employ to keep my tax owed high enough to maximize the benefit of the credits (I.e. itemize some deductions in a subsequent year, generate more interest income through investments to bring up AGI)? Thanks, pimy

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Herb Smith · Accepted Answer

No, it just means that your tax liability is zero. Your after tax income is higher -- which translates to a "gain".

Your point is...?

Not unless you can delay payment of the educational expenses to the future year. I doubt that the school would approve that!

You could always "elect" NOT to itemize deductions, using the credits instead to reduce your tax to zero. Note that deductions can only be claimed in the year paid, not carried forward at your convenience

Tom Russ · Answer

There are generally two strategies for managing this issue.

You can delay deductions into the following year by not paying them this year. One easy one to move about, if you have a mortgage, is the mortgage payment due on Jan. 1st. If you pay early you get it this year. Property taxes can sometimes also be managed in a similar fashion. Optional payments, like (some) medical expenses and charitable contributions can also be easily moved into the following year.
You can generate more income. Interest income from investments is one possibility, although usually not that easy to control directly. If you have appreciated capital assets like stocks or mutual funds, you could sell them to realize capital gains this year. If you want to stay in the same investment, you could even sell and immediately repurchase. The "wash sale" rules apply only to losses, not gains. That would allow you to carefully control the amount of extra income you get this year.

How do I maximize benefit of tax credits?

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