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3 Top Tax Breaks for Middle-Class Americans

By Dan Caplinger - Feb 22, 2016 at 10:03AM

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Ordinary people can benefit from these three favorable tax provisions.

Image source: U.S. Department of Labor via Flickr.

When it comes to tax breaks, middle-class Americans often feel left out. Yet even though there are plenty of tax benefits that rich Americans benefit from, several lucrative credits, deductions, and other provisions target taxpayers with more typical income levels. Let's take a look at three key tax breaks for middle-class taxpayers.

Lifetime Learning Credit
One fact of life for middle-class Americans is that changing careers has become a necessity. The Lifetime Learning Credit helps cover some of the costs of getting the education and training needed to make a career change, and it has two attributes that make it especially useful for middle-income taxpayers.

First, the Lifetime Learning provision reduces tax on a dollar-for-dollar basis, offering a 20% credit for the first $10,000 in expenses for education to acquire or improve job skills or as part of a degree program. That makes it just as good for someone in the 15% tax bracket as for someone in the 39.6% bracket, unlike a deduction that rewards higher-bracket taxpayers more.

Second, the income phaseouts on the Lifetime Learning Credit make it unusable for rich taxpayers. For single taxpayers making up to $55,000 and joint filers making up to $110,000, the full credit is available. Above that, the amount of the maximum credit is reduced, and for those with incomes above $65,000 for singles or $130,000 for joint filers, no credit is allowed.

The credit is available not just for yourself but also for children who are your dependents, but keep in mind that you can take a maximum of $2,000 per tax return, regardless of how many people have qualifying educational expenses.

0% rates on long-term capital gains and qualified dividends
Most people think of investment income as something that only rich people earn, and so a tax provision giving lower tax rates for long-term capital gains and dividends seems designed primary for upper-income taxpayers. But there's one thing that ordinary middle-income Americans can claim that richer ones can't: tax-free treatment.

Specifically, those in the 10% or 15% tax brackets get a special 0% tax rate on income from dividends and capital gains. For your 2015 return, that translates to those with taxable income of up to $37,450 for singles and $74,900 for joint filers. For those earning more than those amounts, higher rates of 15% to 20% apply for such income.

To qualify, capital gains must be long-term on assets held for longer than a year before being sold. Dividend income must be qualified, requiring payment from U.S. or certain foreign companies and with a minimum 61-day holding period in the four months surrounding the dividend payment date. Even with those restrictions, the ability to shelter some investment income from tax entirely is a boon for middle-class Americans who invest.

Child Tax Credit
The Child Tax Credit provides a $1,000 credit for every child under age 16 in your family. As with the Lifetime Learning Credit, the primary benefit of the Child Tax Credit is that it reduces your taxes dollar-for-dollar and it's available only to those who meet its income limits.

The Child Tax Credit's phase-out provisions work differently from most other provisions. If your income is $75,000 or less for singles or $110,000 or less for joint filers, then you can claim the full amount of the Child Tax Credit. Above that level, for each $1,000 in income you have, you lose $50 of your available credit. As a result, how quickly you lose the credit depends on how big a family you have. Nevertheless, the income thresholds squarely give most middle-class taxpayers the full benefit of the provisions.

To claim the credit, a child must meet certain requirements, including being a dependent for tax purposes and being a relative and living with you for more than half the year. However, the provisions offer flexibility to cover not just your own children but also relatives in need.

Rich people might seem to get all the tax breaks, but middle-class Americans have some favorable provisions as well. By knowing about these three tax benefits for the middle class, you'll be better able to take advantage if you qualify for them.

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