How to Calculate Tax Credits

There are two ways to reduce the amount of taxes you owe to the U.S. government: through a tax deduction or a tax credit. A tax deduction reduces the amount of taxable income you have to claim on your tax return. A tax credit, on the other hand, is a direct, dollar-for-dollar reduction in the amount of taxes that you owe. Therefore, if you get a $300 tax credit, you will owe $300 less in taxes.

Research available tax credits on the IRS website. The tax credits available in October 2009 are earned income credit, child and dependent care credit, adoption credit, excess Social Security and RRTA tax withheld, retirement savings contribution credit, and a first-time home buyer tax credit.

Print out the applicable form for each tax credit earned. Gather all documentation it requests and fill out the form completely.

Fill out your Form 1040 completely. Throughout the form, it will ask you to fill in the amounts of your credits. This will either reduce the taxes that you owe or increase your refund.


  • There are a number of websites and companies, such as TurboTax, that offer online programs or software that you can purchase to file your taxes. These programs make filing your taxes much easier. They take you through the application step by step asking all of the needed questions to fill out the 1040 correctly. They will also be able to research which credits are applicable to you and apply them to your bottom line for you.


  • If you file your taxes incorrectly, you will receive a notice from the IRS requesting the corrected amount of taxes that you owe, with late fees added to the balance. Do not try to claim credits that you did not earn. It will only lead to more expense in the end. However, if you make an honest mistake, call the IRS upon receipt of the audit letter and the customer service department will help you figure out your error and calculate the proper payment.