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Tax breaks for minimum wage workers

Minimum wage tax breaks information has been updated in this post published on July 6, 2021.

If you make the minimum wage, you should get a raise today.

Under the final phase-in of wage increases that started in 2007, the federal minimum wage for covered, nonexempt employees today goes up 70 cents per hour to a rate of $7.25 per hour.

The increase got my friend Dara Quackenbush reminiscing on Twitter yesterday:



Although it hasn't been that long ago since Dara graduated from college, her observation illustrates that things haven't necessary gotten better over the years.

It's particularly tough out there in these economic times. A lot of folks are happy just to have a minimum-wage-paying job right now.

When minimum is less: But even with today's slight increase (over the last two years, the minimum wage has gone from $5.85 per hour in July 2007 to $6.55 per hour last summer to today's $7.25), some workers won't be getting even that minimal amount.

The federal minimum wage provisions are part of the Fair Labor Standards Act (FLSA), and that law contains some exceptions from the minimum wage requirement.

Some these exceptions, or exemptions as they are officially referred to by the U.S. Department of Labor which oversees the FLSA, apply to specific types of businesses or types of work.

An employer of a tipped employee, for example, only has to pay that staff $2.13 an hour in direct wages if that amount plus the tips the employee gets equal at least the federal minimum wage. Remember this the next time you think about stiffing your restaurant server.

Another common exception is the youth minimum wage, which is any pay rate above $4.25 an hour. Employers can pay this lower rate to workers younger than age 20 for a limited time (90 calendar, not work, days) after the young employee starts the job.

The Labor Department has details on the youth minimum wage, as well as overall minimum wage rules.

There are, however, a few other pieces of good news (if not more pieces of eight in paychecks) for lower-income workers.

Many states also have minimum wage laws. Where an employee is subject to both state and federal minimum wage rules, the worker is entitled to the higher of the two minimum wages.

There also are some tax breaks for lower-paid workers, even those making a bit more than the minimum wage. 

Do you have to file?
If you don't make a lot of money, the first thing you need to ask is whether you even have to file a tax return.

The filing requirement is based on three factors: Your age, your filing status and your income. Generally, once you reach a certain income level, the law requires you to file.

You'll find the amounts in the 1040 instructions. For 2008, the income filing thresholds were $8,950 for single taxpayers; $11,500 for head of household filers; and $17,900 for married couples filing jointly and both husband and wife are younger than 65. Older workers can make a bit more before they have to file.

The amounts are adjusted annually for inflation, so you'll be able to earn more this year before you have to send the IRS a return.

And even if you don't have to file, if you had taxes withheld, you need to send the IRS a return. That's the only way to get back that money. In this case, consider using the IRS Free File program so that it doesn't cost you to get your refund.

Earned Income Tax Credit (EITC)
If you do have to file but don't make a lot of money, you might be able to claim the Earned Income Tax Credit.

This tax break, usually seen in print as EITC, was created in 1975 as a way for lower-paid workers to offset the Social Security taxes that take such a bite out of their paychecks.

It's a balancing game with the EITC. You have to have a job (hence the "earned income" in the name) to be eligible for this credit, but you can't earn too much. But if you qualify, since it's a credit you get to use the amount to reduce or eliminate any taxes you might owe.

Even better, it's one of the few refundable credits. That means if you don't owe the IRS anything, the credit amount will be sent to you as a refund.

A common EITC misperception is that it's only for folks with dependent children. Not true. While you'll be eligible to collect a larger credit if you do have kids, childless folks can get some credit cash, too. 

But for EITC-eligible folks with three or more children, the American Recovery and Reinvestment Act, the stimulus bill signed into law back in February, made this tax credit a bit more appealing for 2009 and 2010 tax years.

For 2009, the maximum available EITC amounts are:

  • $5,657 with three or more qualifying children,
  • $5,028 with two qualifying children,
  • $3,043 with one qualifying child, and 
  • $457 with no qualifying children.

To get those credit amounts, your income in 2009 must be less than:

  • $43,279 (48,279) married filing jointly)with three or more qualifying children,
  • $40,295 ($45,295 married filing jointly)with two qualifying children,
  • $35,463 ($40,463 married filing jointly)with one qualifying child, and
  • $13,440 ($18,440 married filing jointly) with no qualifying children.

There are, of course, some specific qualifications to meet before you can claim the EITC. The IRS' online EITC Assistant (it's not yet updated for 2009 returns, so keep checking back) can help you determine whether you're eligible for this credit and if so, how much you can claim.

Student loan interest
If you're a new graduate paying off student loans, be sure to take advantage of the student loan interest deduction. Heck, even if you've been out of school for a while and are still trying to get out of that debt, this is for you.

A very nice feature of this deduction is that you don't have to itemize to claim it. You'll find the option to deduct $2,500 worth of student loan interest in the last section on the first page of both the Form 1040 and Form 1040A.

For 2009, the amount of the student loan interest deduction is phased out if your filing status is married filing jointly and you and your spouse make between $120,000 and $150,000 combined. You cannot take the deduction if your income is $150,000 or more.

For all other filing statuses, your student loan interest deduction is phased out if your income is between $60,000 and $75,000. If you make more than 75 grand, you're not eligible for this tax break.

And if you make more than 75 grand, why are you reading about minimum wage tax breaks?

Education credits
If you have a minimum-wage job and hope to one day make too much to be eligible for some tax breaks, you might need to go back to school. The tax code can help out here, too.

Thanks to the stimulus package, the Hope Scholarship Education Credit has a new name and for 2009 and 2010 new features. This tax year and next, the newly named American Opportunity Tax Credit increases from a maximum $1,800 to $2,500 per year.

It also applies to all four years of college and adds course materials to qualifying expenses list. The phase-out level also is kicked up to $80,000 for single filers, $160,000 for couples with joint returns.

Plus, 40 percent of this new credit is refundable. That means you could get some or all of it back. Even if you don’t make enough money to file a return, if you qualify for the American Opportunity Tax Credit you should file anyway because you may get up to $1,000 (40 percent of the maximum $2,500) back.

Looking for, moving to work
If you're looking for better-paying work, keep track of your job-search expanses. You might be able to write them off on your next tax return. You can get more details on what you can and can't deduct and how to do so in this story.

One of the downsides of the job-search deduction, however, is that you can't claim it if you're looking for your first job. But if you move to take work, be it your first or your 101st job, you might be able to write off those relocation expenses.

These are just a few of the ways the tax code can help the hard-working supplement their low-paying jobs. I hope these tax tips help and that you get a decent raise soon!


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cherilynn stone

Great post! Thanks

My Journey

I remember while going through law school (only graduated a couple years ago) all the Bursar people said, don't worry about the student loans the interest is tax deductible lol.

It was only after I got my job and I was phased out did I learn the truth.

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