Tax Return

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Some of the most lucrative tax breaks available are designed to help low- to moderate-income families save for retirement, raise their children, and simply increase their income. If you fall into the sub-$50,000 income group, here's how the Retirement Savings Tax Credit, the Earned Income Tax Credit, and the Child and Dependent Care Credit could put thousands of dollars back in your pocket at tax time.

The government will pay you to save for retirement
It's a well-known fact that many contributions to retirement accounts can reduce your taxable income. For example, most people can get a deduction for traditional IRA contributions.

However, did you know that there is a tax credit designed to help lower-income individuals save for retirement?

The Retirement Savings Contributions Credit, also known as the Saver's Credit, is worth up to $2,000 for taxpayers whose adjusted gross income (AGI) is less than $61,500 for married couples, and $30,750 for single filers.

The amount of the credit is 10%, 20%, or 50% of your first $2,000 in retirement savings ($4,000 per couple), depending on your income. Here are the 2016 AGI limits:

Credit rate

Married filing jointly

Head of household

Singles (and others)

50%

Less than $37,000

Less than $27,750

Less than $18,500

20%

$37,001-$40,000

$27,751-$30,000

$18,501-$20,000

10%

$40,001-$61,500

$30,001-$46,125

$20,001-$30,750

Source: IRS

For example, let's say that you're a single filer with an adjusted gross income of $30,000. If you set aside $2,000 for your retirement, either in a 401(k), IRA, or other retirement plan, you could qualify for a credit of $200. This isn't just a deduction -- the government will literally give you $200 just for saving money.

You can still take advantage of this for 2015. You can make an IRA contribution until the April 18 tax deadline and have it count for the 2015 tax year.

Earned income tax credit
One big tax benefit for lower-income taxpayers is the Earned Income Tax Credit, or EITC. As the name implies, in order to qualify, you must have earned income during the year. If you are attempting to qualify for the credit with one or more children, they also must meet certain qualifications:

  • The child must have a Social Security number.
  • They must be your son, daughter, adopted child, stepchild, foster child, brother, sister, half brother or sister, step brother or sister, or a descendant of any relationship on this list.
  • They must be younger than 19 (and younger than you and your spouse), or younger than 24 if they're a full-time student or they must be totally and permanently disabled.
  • The child must live with you for more than half the year.

To qualify as low- to moderate-income for EITC purposes, your earned income and AGI must be less than these limits (for the 2016 tax year):

Number of children

Single filers or Head of household

Married filing jointly

0

$14,880

$20,430

1

$39,296

$44,846

2

$44,648

$50,198

3+

$47,955

$53,505

Source: IRS

In addition your investment income must be no more than $3,400 for the year. If you qualify, the credit can be rather lucrative. For the 2016 tax year, the maximum credit amount is:

  • $506 with no children
  • $3,373 with one child
  • $5,572 with two children
  • $6,269 with three or more children

Child and dependent care: what qualifies?
You might qualify for the Child and Dependent Care credit if you paid for the care of a qualifying child in order to allow you to work or look for work. If you qualify, the credit is worth 20%-35% of your qualified expenses, up to $3,000 per child or $6,000 for two or more children.

Now, this credit is technically not a low-income benefit -- you can claim the credit regardless of your income. However, the amount of the credit increases for lower-income taxpayers.

In order to qualify for the credit, the following conditions must be met:

  • The individual being cared for must be 12 or younger at the end of the year and must be claimed as a dependent on your tax return. Older dependents can qualify, if they are unable to take care of themselves.
  • You and your spouse must have earned income -- meaning that you both earned money from a job.
  • The expense must actually be for child care, not for any other activity. For example, an after-school tutoring service does not qualify. Tuition expenses at the kindergarten level and above also don't qualify. There is admittedly some grey area here, so check with a tax professional if you have some "borderline" child care expenses.

As I mentioned earlier, the credit ranges from 20% (for higher incomes) to 35% (for lower incomes), and here is the IRS chart that can help you determine the amount of your credit:

Child Care Credit Table

Source: IRS

For example, if your AGI is $30,000 and you incur $2,000 in qualifying expenses, you could qualify for a credit of 27% of that amount, or $540. Just like the other two tax breaks mentioned, this is a credit, not a deduction. This would actually be an extra $540 back in your pocket.

There may be others
This is by no means a complete list of the tax benefits you might qualify for if you earn less than $50,000. For example, many people are in low income brackets because they're students, and these individuals may qualify for one or more education deductions or credits. Many teachers earn less than $50,000 per year, and may deduct up to $250 in out-of-pocket classroom expenses.

When doing your taxes, be thorough and be sure to investigate the tax breaks to which you may be entitled. Some of the deductions and credits you might qualify for could put thousands of dollars back in your pocket.

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