Many taxpayers believe that only the wealthy can benefit from tax breaks. Yet even though there are provisions of the tax code that favor higher-income taxpayers, there are also plenty of opportunities for those whose incomes aren't up in the stratosphere.
Many tax breaks have income ceilings above which they start to phase out. Those limits vary from provision to provision, but the three breaks discussed below are geared to deliver more of their benefits to low- and middle-income taxpayers who have children. Let's look at them more closely both for use on the 2017 tax returns that you're preparing now, and for future years.
1. A credit for every child
Simple tax breaks are often the best, and the child tax credit has an easy-to-understand structure. Eligible children under 17 can give their parents a $1,000 credit for the 2017 tax year, and it's generally available for children who are related to you, live with you more than half the year, and for whom you provide sufficient financial support. For 2017, the Child Tax Credit phases out for single filers once they make more than $75,000, with a $50 reduction per $1,000 in additional income. The corresponding limit for joint filers is $110,000.
The child tax credit will get bigger in 2018, and it'll be available to a wider audience. The amount doubles to $2,000, and income thresholds will rise to $200,000 for singles and $400,000 for joint filers. That will make the credit much less of a low- and middle-income break and encompass all but the wealthiest of taxpayers.
2. Paying for education
College costs are high, but the American Opportunity Tax Credit can help you get some payback on those expenses from Uncle Sam. The credit is 100% of the first $2,000 in undergraduate educational costs plus another 25% of the next $2,000. It's available for up to four years per student.
Like the child tax credit, the American Opportunity Tax Credit has income threshold limits. If you're single, the credit starts to go away at $80,000 and then disappears entirely at $90,000. The corresponding limits for joint filers are $160,000 and $180,000 respectively. With no changes planned for 2018 or future tax years, the credit is a great way to get partial payback for money you spend on tuition, mandatory school fees, and essential textbooks and other materials.
3. Help with child care
Parents who work often need day care, and the child and dependent care tax credit seeks to help with those expenses. Unlike the other two credits, anyone can claim the child and dependent care tax credit, but larger credits are reserved for lower-income taxpayers. The credit rate is 35% for those with $15,000 or less in income, with the rate falling by a percentage point for every $2,000 in additional income before hitting a minimum of 20% at $43,000.
The credit is available on up to $3,000 in expenses for one child or $6,000 for two or more children, with no plans to change it in 2018 and in following years. You must have earned income to qualify, and married couples need to have both spouses working. The $600 to $1,050 you'll get from the credit won't necessarily pay for a huge amount of care, but it will still help to cushion part of the financial blow from needing to ensure your children are looked after while you work.
Use what you can
Many taxpayers of modest means don't both looking for tax breaks because they think that they have to be rich to find any good ones. But these three provisions can save you thousands of dollars. Look closely and see whether they can help you with your taxes this year and beyond.
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