No one likes to pay any more in taxes than they have to, and for those who don't have upper-class salaries, it's even more important to preserve every dollar you can. For those who make more than $90,000 a year in income, tax deductions can be extremely valuable. But for those of more modest means, tax credits often offer more bang for the buck. In particular, the three tax credits below offer helpful ways for many taxpayers to reduce their tax bills.
American Opportunity Tax Credit
The American Opportunity Tax Credit offers big tax breaks for those who have kids in college. For up to four years of higher education, the provision offers a 100% credit on the first $2,000 in educational expenses and a 25% credit on the next $2,000, topping out at a total amount of $2,500.
However, income restrictions limit the use of the American Opportunity Tax Credit. For single filers with modified adjusted gross incomes above $90,000, the credit isn't available at all. A partial credit applies to those with incomes between $80,000 and $90,000, with those making less than $80,000 remaining eligible for the full credit. The corresponding limits for joint filers are $160,000 and $180,000.
Child Tax Credit
The Child Tax Credit is one of the simplest provisions in the federal tax laws. Under the credit, taxpayers get $1,000 for each of their eligible children age 16 or younger. In order to qualify, the child must be a relative and must live with you for more than half of the year. There's also a financial obligation test that you must meet to claim the credit.
The Child Tax Credit begins to phase out once income hits $75,000 for single filers, $110,000 for joint filers, or $55,000 for married people filing separately. The phaseout takes away $50 of the credit for every $1,000 in additional income you have, so even single filers with $90,000 in income typically still can get at least some of the credit they're entitled to take.
Child and Dependent Care Tax Credit
The Child and Dependent Care Tax Credit offers financial assistance to those families that incur expenses for the care of children or other dependents. The credit is available to all, regardless of income level, but the amount of the credit varies depending on how much money you make.
Specifically, those who have income of less than $15,000 are eligible for a credit of 35% of what they pay for child and dependent care, up to a maximum expense of $3,000 for one dependent, or $6,000 for two or more dependents. That percentage drops by a percentage point for every $2,000 you earn above $15,000 until it hits the 20% mark. Those who earn $43,000 or more get the 20% credit.
In order to qualify, you must have earned income from a job or other work, and if you're married, your spouse also needs to have earned income. The idea behind the credit is to encourage families to look for and find work rather than to provide a tax break for families in which there's already a stay-at-home parent caring for a child. Despite the higher credit for the lower end of the income spectrum, those who make closer to the $90,000 mark can still get a sizable tax break from the Child and Dependent Care Tax Credit.
Most tax analysts don't spend much time focusing on the tax breaks that ordinary Americans with family incomes of $90,000 or less can qualify to receive. But for those who work hard to meet their current financial needs and still have something left over for long-term financial planning, tax breaks like the American Opportunity Tax Credit, Child Tax Credit, and Child and Dependent Care Tax Credit all provide a helping hand to make their tax burdens a little lighter.