MIDDLE-CLASS TAX BREAKS
BY JAY ALLEN FINN, CPA, AND FORMER IRS REVENUE AGENT
Many in the middle class qualify for important tax deductions.
In recent years, lawmakers have enacted dozens of tax incentives targeted at middle-class families. Taking full advantage of these tax deductions and credits is particularly important for dual-income families.
TAX CREDITS VS. TAX DEDUCTIONS
A Tax Credit lowers your taxes dollar for dollar. A tax deduction lowers your taxable income. So, if you have a $1,000 deduction and you are in the 15% bracket, you will save only $150.00. But, if you qualify for a credit of $1,000.00, you could get a deduction of the entire $1000 from your taxes.
EARNED INCOME CREDIT
The government provides an incentive for people to work through the Earned Income Tax Credit (EITC). The EITC can result in a tax refund. The EITC ranges from $496 to $6,143. The credit is dependent on the taxpayer’s income, and filing status. Some states and municipalities have created their own versions. But, if you live in a state such as Texas or Florida, you are only eligible for the Federal EITC. In most states, your earned income and adjusted gross income (AGI) must be less than $14,590.
MORE CHILD TAX AND TAX CREDITS
For middle-income earners with a new child (baby), there is a $1,000 child tax credit. It does not matter when the child was born, as long as the child was born before December 31st at midnight. This tax credit is a gift from the government. It continues every year until your dependent son or daughter turns 17. The credit reduces your tax bill dollar for dollar. So, a $1,000 child credit will reduce your tax bill by $1,000. There is no limit on how many kid5s you may claim on your return. This credit begins to disappear as income rises above $110,000 on joint returns. On single $75,000 on single and head-of-household returns. For some lower-income taxpayers, the credit is “refundable”. This means that the IRS could issue a check.
CHILD CARE TAX CREDIT
The Child Care Credit can reduce the cost of child care. Taxpayers with children younger than 13, may be eligible for a credit of up to $3,000 per child up to 2 children. This credit is 20-35% of child care expenses based on income. Eligible expenses include the cost of a nanny, preschool, daycare and summer day camp.
CAPITAL GAINS TAX
For some high investors, the greatest capital gains rate could be as high as 20%. But, investors in the two lowest income tax brackets pay 0-15% tax. This could be important to workers when planning for retirement. Because many retirees will be in a lower tax bracket at retirement.
Qualify: 0% Capital-Gains Rate
- Single – Taxable income can not exceed $36,900
- Single head of household with dependents – Taxable income can not exceed $48,600.
- Married-Filing-Jointly – Taxable income can not exceed $73,800
The standard deduction can reduce taxable income by $16,000 or more. Thus, meeting that taxable income to receive the zero capital gains might not be a problem at all.
GET PAID TO GO TO SCHOOL
Congress extended the American opportunity tax credit through 2017. It is available for up to $2,500 of college tuition and related expenses paid during the year. The tax credit begins to phase out for single taxpayers with income greater than $90,000.
The American Opportunity Credit covers all four years of college. And 40% of the credit is refundable. For example, suppose you owe $1,900 in federal taxes and qualify for the full credit. In this case, you would receive $600 as a tax refund.
The Lifetime Learning Credit allows you to get a tax credit for continuing education. This credit is easy to qualify for and is for many education reasons and at almost any school. The Lifetime learning Credit is for 20% of up to $10,000 of qualified expenses. So, you can get back $2,000 per year.
The income limits for a single taxpayer’s Lifetime Learning Credit is $63,000. A married taxpayer can have income up to $127,000. But, you can’t claim the LLC credit in tandem with the AOC credit for the same student in the same year. And, there is no double dipping allowed. Expenses paid with the Coverdell ESA, don’t count when figuring either credit.
If you don’t qualify for the AOC or the LLC, you may still get a tax break.
1)You can deduct up to $2,500 of interest paid on a student loan each year. Your MAGI must be below $75,000 if filing single. A former student can qualify for the deduction even if their parents are paying the bill.
2) Interest on savings bonds is usually subject to federal income tax. Some bonds qualify for tax-free interest if used to pay for college.
Depending where you might fit into the middle class, these are just a few items to take advantage of.
Be sure to work with a CPA, expert like Jay Allen Finn, CPA, a Former IRS revenue agent.