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Are There Special Tax Breaks for Low-Income Taxpayers?

By Dan Caplinger - Apr 7, 2016 at 2:19PM

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These tax provisions are aimed at those with low incomes. Find out more about them.


Image: 401kcalculator.org via Flickr.

April is the time when everyone scurries to find whatever tax breaks they can take to pay less to the IRS. Although many people think of tax breaks as primarily going to the wealthy, there are several provisions in the tax laws that aim directly at those with more modest incomes. In particular, the following two tax breaks are especially valuable to low-income taxpayers.

Earned Income Tax Credit
The Earned Income Tax Credit rewards taxpayers who work and have relatively limited incomes. The amount of the credit and the eligibility thresholds for allowable income differ depending on your filing status and the size of your family. You can find the maximum amounts of income that you can have and still claim the credit for the 2015 tax year below, along with the maximum credit.


Source: IRS.

To qualify for earned income tax credit purposes, a child must be 18 or younger, or a full-time student who is 23 or younger. The child must also be related to you, although grandchildren, nephews and nieces, or other eligible relatives can qualify if they live with you more than half the year.

Numbers approaching $50,000 for a married couple with two kids might not sound like low-income to some, but it's important to understand the structure of the credit. For this example, the credit rises until it hits a maximum of $5,548 when you reach roughly $13,850 in income. It then stays at the maximum amount until your income rises to $23,650. Above that limit, the credit gradually declines. For instance, a family with income of $40,000 will get a credit of $2,095. That's still substantial, but the lower amount shows the emphasis on truly low-income taxpayers.

Finally, the most valuable thing about the earned income tax credit is that it's a refundable credit. Even if you have no tax liability, you can still get a refund check from the IRS for the credit. That's unusual for most tax provisions, but it's especially advantageous to low-income taxpayers whose tax bills sometimes aren't high enough to use up a regular credit.

Saver's Credit
The other big tax break for low-income taxpayers is the Retirement Savings Contributions Credit, known more simply as the Saver's Credit. This provision allows you to claim a tax credit for contributions of up to $2,000 to an IRA, 401(k), or other tax-favored retirement account.

The credit is available for taxpayers who earned up to certain threshold amounts, depending on filing status. However, the credit is larger for those at the lower end of those income ranges, and shrinks for those at the upper end.


Source: IRS.

As you can see in these figures for the 2015 tax year, the impact of the credit is largest for low-income taxpayers. Singles making up to $30,500 can claim the credit, but the most that the highest-earning people claiming the credit will be able to get is 10% of the first $2,000 they contribute, or $200. By contrast, single filers making less than $18,250 will get a credit as large as $1,000 if they can come up with $2,000 to set aside for retirement. The same general idea holds for married couples and those filing as heads of household as well. Qualifying for what amounts to a 50% match from the government is worth looking into, even though it represents a stretch for the budgets of many low-income taxpayers.

Low-income taxpayers need all the help they can get at tax time. These two tax breaks can go a long way toward giving you the relief you need to get your obligations to the IRS taken care of for another year.

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