Smart taxpayers pay as little in tax as they can, and that requires taking advantage of every tax break they can find. Yet many taxpayers end up neglecting some extremely valuable provisions that can legally reduce your tax bill by thousands of dollars. By being aware of these three commonly forgotten tax breaks, you can put yourself in a better position to pay no more than you absolutely have to pay to the IRS.
1. Earned income tax credit
The earned income tax credit offers a key tax break to low- and middle-income taxpayers. The credit applies to some taxpayers with adjusted gross income of as high as $53,500, and credits can range all the way up to slightly above $6,250. The largest credit amounts are available to those with children who are under 19 or a full-time student under 24.
The way the credit works is that the more you earn up to a certain point, the greater your credit amount is. Once the credit hits its maximum, earnings above a certain higher threshold start to phase out the credit, leading to a smaller credit amount. However, the best thing about the earned income tax credit for many taxpayers is that you can get a refund for the credit amount even if you don't have any tax liability against which to claim the credit. That's unusual for tax credits, but special provisions for the earned income tax credit make it possible. Yet according to the IRS, about one in five taxpayers doesn't claim the earned income tax credit even though they're eligible, so it's worth looking closely to see whether you can get your share.
2. Child and dependent care credit
Taxpayers with children can also typically claim another credit. The child and dependent care credit offers a 20% to 35% credit on up to $3,000 in care expenses for one child or $6,000 for two or more children. The credit amount varies according to your income, with lower-income parents getting a higher percentage credit.
To qualify, children must be no older than 12, and if you're married, you must file jointly, and both spouses must have earned income at least equal to the amount of child care expenses paid. In addition, it's important to get verification from your child care provider so that you can complete the tax form on which you'll claim the credit. One common reason why taxpayers don't get the credit is that some providers don't automatically send the correct tax form. But it's worth the extra effort to make sure you get the savings you deserve.
3. Traditional IRA deduction
Finally, most people understand that contributions to IRAs are deductible, but what they often forget is the timing advantage that these retirement account contributions have over other tax-saving measures. Most deductions only apply if you take action during the calendar year for which you're filing, so Dec. 31 was a big deadline for most of the things you can do for the 2016 tax year.
However, IRAs offer more time to contribute to a retirement account for the year. Contributions for the 2016 tax year are allowed through the initial filing deadline, which this year is April 18. By contributing the maximum of $5,500 for those under age 50 or $6,500 for those 50 or older, you can reap tax savings that can cut thousands of dollars off your final tax bill -- essentially letting the IRS contribute its fair share toward your long-term goal of financial security in retirement.
Taxpayers can't afford to forget any of the tax breaks that they're entitled to receive. In particular, these three tax provisions can save many people thousands of dollars, and so they're worth a closer look to see if you qualify to get them.