Tax breaks for the wealthy grab a lot of headlines, but there are plenty of tax breaks available for middle and low income families if you know where to look. Here are a few of my favorite tax credits:
Saver’s Credit: Low and moderate income workers who save for retirement in 401(k)s and individual retirement accounts may be eligible for a tax credit worth up to $1,000 for individuals and $2,000 for couples. The credit can be claimed by individuals with adjusted gross income of $29,500 or less and couples with AGI of $59,000 or less.
The credit is worth 10 percent to 50 percent of the first $2,000 you put into your retirement account. The lower your income, the higher the percentage you get back via the credit.
Some key exceptions: Taxpayers under age 18, full-time students and those claimed as dependents on their parents' returns are not eligible, regardless of their income.
The Saver’s Credit is powerful because you get twice the tax benefits. By contributing to your retirement you are reducing your tax burden, but on top of that you are also getting a credit. Workers who missed out on contributing to their 401k in 2013 still have until April 15, 2014, to make an IRA contribution and grab this valuable tax break.
Earned Income Tax Credit: The Earned Income Tax Credit (EITC) is a tax credit designed by the government as an incentive for low to moderate income taxpayers to work. For 2013, the maximum EITC ranges from $487 to $6,044 depending on your income and number of children.
The income limits on this program are fairly low. If you have no kids, for example, your earned income and adjusted gross income (AGI) must each be less than $14,340 if you're single and $19,680 if you're married filing jointly. If you have three or more kids and are married, though, your earned income and AGI can be as high as $51,567.
Unlike most other tax credits, the EITC is refundable. This means that the credit can wipe out any taxes owed and result in a check back to you above and beyond what you paid in. The exceptions are considerable—more complicated than I can list here—so be sure to check with a professional to see if you qualify.
Child Tax Credit: With a new baby also comes a $1,000 child tax credit to lower- and middle-income earners, and this is true until your dependent son or daughter turns 17.
You get the full $1,000 credit no matter when during the year the child was born. The credit begins to disappear as income rises above $110,000 on joint returns and above $75,000 on single and head-of-household returns—although there's no limit to how many kids you may claim on a return, as long as they qualify. For lower-income taxpayers, the credit is refundable just like the EITC.
The above is a summation of complex tax law. Please check with your tax professional before making a decision. Our CPAs at Milliken, Perkins, and Brunelle are available to assist you any time of year.