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6 tax credits for lower-to-middle income taxpayers

Photo by Ozan Safak on Unsplash

Higher income taxpayers tend to take the most advantage of tax breaks.

That's no surprise. They can afford to hire tax professionals, who keep track of all the benefits they qualify for and claim them on the well-to-do taxpayers' returns.

But there are some valuable tax breaks for the rest of us who are far from wealthy.

And while higher-income households do enjoy greater per dollar benefits tax benefits, the breaks available to us tax plebeian are more beneficial when they are measured as a share of our income.

Tax credits provide the most benefits. Whereas tax deductions reduce the amount of income that's taxable, a tax credit is a dollar-for-dollar offset of any tax you owe. And when a tax credit is refundable, in full or part, once it zeroes out what you owe the U.S. Treasury, you get the excess amount back as a refund.

Here are five tax credits to check out if, relatively speaking, you don't make that much money.

1. Earned Income Tax Credit (EITC): This tax break is one of the best for lower- and middle-income workers. First off, the EITC is a sizable amount for certain taxpayers. Plus, it's one of those refundable tax credits.

But despite these tax positives, a lot of eligible filers ignore the EITC every year.

Why? Part of the problem is that it's complicated.

It's also a balancing act. 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.

For 2023 tax returns, EITC claimants' income must not exceed the following limits, with single filers' maximum earnings listed first and the amount for married filing jointly (MFJ) couples in parentheses —

  • $17,640 ($24,210 MFJ) with no qualifying children;
  • $46,560 ($53,120 MFJ) with one qualifying child;
  • $52,918 ($59,478 MFJ) with two qualifying children;
  • $56,838 ($63,398 MFJ) with three or more qualifying children.

As the above income ranges show, it's a myth that the EITC is only for folks with kids. While it is true that you'll be eligible to collect a much larger credit if you do have kids, childless folks also can get a bit of EITC cash.

For 2023 taxes, the maximum available EITC amounts are —

  • $600 for taxpayers with no dependent children;
  • $3,995 for filers with one qualifying child;
  • $6,604 for those with two qualifying children; and
  • $7,430 for families with three or more qualifying children.

As noted, there are some specific, and often confusing, qualifications you and your qualifying dependents must meet before you can claim the EITC. The IRS' online EITC Assistant can help you determine whether you're eligible for this credit and if so, how much you can claim.

2. Child Tax Credit (CTC): This popular tax was boosted during the height of the COVID-19 pandemic, and a pending tax bill could increase the amount for the 2023 tax year. If that happens, IRS Commissioner Danny Werfel recently told the House Ways and Means Committee that his agency is ready for the revision.

"It will be a top priority to make sure that this gets done," Werfel told the tax writing panel at a Feb. 15 hearing.

But Werfel also earlier encouraged taxpayers to go ahead and file their taxes and not wait on Congress. He's sticking by that advice, telling the W&M members that if the increased CTC is implemented, taxpayers who claimed the lower amount won't have to file amended returns; the IRS will take care of getting them their additional CTC amounts.

Right now, that 2023 tax year CTC amount is $2,000 per child, with a maximum refundable per-child amount of $1,600.

While the CTC is not specifically for lower-income taxpayers, wealthier taxpayers don't get the full credit. It's reduced for those with annual income exceeding $200,000 ($400,000 if filing a joint return).

The IRS' interactive tax assistant can help you determine if you qualify for the CTC, and for how much.

3. Child and Dependent Care Tax Credit: Finding affordable and good care for your kiddos while you go to work is one of the biggest parental concerns. The tax code can help a bit via the Child and Dependent Care Tax Credit.

The credit won't cover all your care costs. The maximum credit is 35 percent of your allowable expenses. Those costs also are capped at up to $3,000 for care of one child, and $6,000 for two or more children.

When all the math is done, the maximum credit comes to —

$3,000 in care costs for 1 child
 x 35% 
$1,050 child care tax credit claim

$6,000 in care costs for 2 or more children
 x 35% 
$2,100 child care tax credit claim

Those maximum credit amounts also are for working parents who aren't making a lot. The top adjusted gross income level to claim any of the credit is $43,000.

4. and 5. Education tax credits: If you are classes so that you can get a better paying job, let your Uncle Sam help. He has several education tax breaks that help you cover many of your higher education costs.

Two of the most popular are the American Opportunity Credit and the Lifetime Learning Credit. They are worth, respectively, $2,500 and $2,000.

The American Opportunity Credit is for students pursuing their first four years of post-secondary higher education. The Lifetime Learning Credit can be used to pay for educational costs beyond that time frame, such as a worker who takes classes to improve job skills.

My post comparing the American Opportunity and Lifetime Learning credits can help you determine which one works best for you.

6. Retirement Savings Contribution Credit: It's tough to think about your financial future when you're just trying to make it through the financial now. But if you can stash a few dollars in an IRS-approved retirement savings plan — such as a workplace 401(k), a traditional or Roth IRA, a self-employed retirement account if you're your own boss, or an Achieving a Better Life Experience, or ABLE, account — the Retirement Savings Contribution Credit is a nice reward.

Also known as the Saver's Credit, eligible individuals could get a maximum tax credit of up to $1,000. That one grand credit max is available to workers who don't make that much, but who are trying to plan for the future.

For 2023 tax returns, the Saver's Credit maximum earnings caps go to —

  • $36,500 for singles and married filing separately taxpayers:
  • $54,750 for heads of household; and
  • $73,000 for married couples filing jointly.

Once you hit the amount for your filing status, you can't claim the credit. Note, too, that the Saver's Credit is nonrefundable, meaning if you have any excess after covering your tax liability, you can't get it back.

Get help to claim the credits: These are just a few of the ways the Internal Revenue Code can help you supplement a not-quite-enough paycheck.

And yes, some of these credits for us regular Joe and Jane Taxpayers can be complicated. But tax software, including the no-cost options at Free File for taxpayers with adjusted gross income of $79,000 or less, can help you work the claims.

If you want face-to-face filing help to make sure you don't overlook any tax credits, check out your local Volunteer Income Tax Assistance (VITA) or Tax Counseling for the Elderly (TCE) sites. IRS trained staff are happy to help you make the most of these credits and other available tax breaks.

They're definitely worth the effort to get you some much-needed tax savings (or a refund!) until you finally get the decent raise you deserve!

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