Make it a practice to take advantage of every tax credit and deduction available to you. Credits provide a dollar-for-dollar reduction in income tax liability; that is, a $1,000 credit actually saves you $1,000 in taxes.

Deductions, on the other hand, lower your taxable income. For example, if you are in the 25% tax bracket, a $1,000 deduction saves you $250 in tax, which is $750 less than the savings with a $1,000 tax credit.

Child Tax Credits

Parents with dependent children under age 17 are entitled to claim a tax credit of up to $1,000 through 2010. Under a provision of the American Recovery and Reinvestment Act of 2009 (ARRA), the child tax credit is refundable to the extent of 15% of an individual’s earned income in excess of $3,000 in 2009 and 2010.

Those who adopt a child can receive a tax credit of up to $12,150 in 2009. Those adopting a child with special needs may claim a $12,150 tax credit in the year the adoption is completed, even if they do not have qualified adoption expenses.

Both of these credits are subject to phase out depending on your income level. To see if you qualify, click here.

Making Work Pay Credit

Under this provision of the American Recovery and Reinvestment Act of 2009 (ARRA), wage earners and the self-employed are permitted to claim a credit equal to the lesser of 6.2% of earned income or up to $400 a year for single filers ($800 a year for joint filers) in 2009 and 2010. However, the credit will phase out for taxpayers with adjusted gross income (AGI) over $75,000 for single filers and $150,000 for joint filers. Rather than sending out these rebates in the form of checks, employers will adjust the amount withheld from each paycheck, resulting in an increase in workers’ take-home pay. Taxpayers who do not have taxes withheld by an employer during the year may claim the credit on their tax return. Self-employed taxpayers will be permitted to lower their estimated tax payments in 2009 and 2010.

First-time Homebuyer Tax Credit

The $7,500 credit in effect for 2008 for taxpayers buying their first home is expanded by the American Recovery and Reinvestment Act of 2009 (ARRA). The amount of the credit increases to $8,000 for primary residences purchased between January 1, 2009 and November 30, 2009. Under the legislation, the previous requirement that the credit be repaid is waived after 36 months in the home. The credit starts to phase out for taxpayers with AGI above $75,000 for single filers and $150,000 for joint filers.

New Car Deduction

Under the American Recovery and Reinvestment Act of 2009 (ARRA), buyers of new cars, light trucks, SUVs, motorcycles, or motor homes after February 17, 2009 and through the end of the year will be permitted to deduct the state sales or excise tax paid on the first $49,500 of the vehicle’s price. This is an above-the-line deduction. Whether you itemize or not, "above-the-line" deductions are subtracted from gross income to arrive at your AGI. Such deductions help to protect your personal exemptions and itemized deductions from phaseouts. The new car deduction starts to phase out for single filers with AGI over $125,000 and for joint filers with AGI over $250,000.