In addition the many tax deductions and credits that taxpayers often overlook, a few more few tax credits are easy to forget about and thus go unclaimed, especially for those taxpayers who have higher incomes. That's because the situations that generate these tax credits aren't something you'll see every year. And if any of the situations below apply to you, consider it another of the many good reasons to have a tax professional prepare or at least review your 2014 tax return.
You don't want to miss claiming a tax credit because unlike a deduction, when you claim a tax credit, it results in a dollar-for-dollar reduction in taxes owed. For example, a $1,000 deduction reduces your taxable income, and results in only a $280 reduction in taxes (for taxpayers in a 28% marginal income tax bracket).
But when you claim a $1,000 tax credit, your tax liability gets reduced by the same amount, resulting in $1,000 less in taxes paid. So, a $1,000 tax credit generates the same tax savings as more than $3,500 in tax deductions for someone in the 28 percent tax bracket.
Here are three tax credits that high earners tend to overlook.
Credit for excess Social Security tax:
If you worked for two or more different employers last year and had combined gross wages in excess of $117,000 in 2014, then you paid too much Social Security tax. What happens in these situations is that each employer withholds your portion of this tax from your pay because your current employer doesn't check with your former employer to see if you had already earned over the maximum wage base.
Only your total combined earnings up to $117,000 is subject to the Social Security retirement tax, so any tax you paid on the excess earnings should be fully refunded. To make sure your tax preparer or program is claiming this tax credit for you, check Line 71, excess Social Security in the Tax Payments section of your Form 1040.
Foreign tax credit:
If you own a diversified portfolio of stocks and mutual funds in a taxable account, or you own an interest in a partnership with earnings from foreign sources, you may have indirectly paid some foreign tax and, therefore, should be entitled to a special tax credit. Don't skip this thinking you didn't directly pay foreign taxes. The applicable tax is typically withheld and paid by the mutual funds or other investments you own that invest abroad.
Look at your Form 1099 B or other year-end tax statements for the amount of foreign tax paid from your mutual funds and other taxable accounts. On that form you should see a box labeled foreign taxes paid. If the amount of foreign tax paid is $300 or less ($600 for joint filers), it's a simple matter of just claiming this amount on Line 48 of your Form 1040. If the foreign tax paid is more than that, you'll need to also file Form 1116 Foreign Tax credit to calculate the applicable credit you can claim.
AMT tax credit:
If you paid the Alternative Minimum Tax, or AMT, in a prior year but don't owe it this year, you may be eligible to claim an AMT tax credit. This credit is for the portion of the AMT that's related to special income items such as exercising incentive stock options and other forms of income deferral. To calculate and claim the AMT credit, you'll need to complete and attach Form 8801, Credit for Prior Year Minimum Tax and then report the credit on Line 54 of your Form 1040.