Taking advantage of tax breaks aimed at working families can significantly decrease your tax burden. Lowering your adjusted gross income (AGI) through eligible deductions is especially important when filing jointly if both spouses work and earn an income.
Check out these 12 tax breaks for middle class families.
1. Traditional IRA deduction, 401(k) or SEP contribution deduction
If you contributed money to a retirement account last year, you can deduct some of the money from your taxes when you file this year.
If you contributed money to a 401(k) in 2016, those contributions are not included in your taxable income — so you don’t take a deduction when you file your return. For 2016, you could contribute $18,000 or $24,000 if you’re 50 or older by the end of the year.
Though you can’t get a tax deduction for a Roth IRA, you can for a traditional IRA. And the good news is, you have until the tax deadline of April 18, 2017, to contribute! Deduct all of your contributions up to the maximum $5,500 if you’re under 50, or $6,500 if you’re 50 or older.
If you’re self-employed or earn income from a side job, you could contribute up to 25% of your net income to a Simplified Employee Pension, or up to $53,000 for 2016. In addition, you can make 2016 contributions to a SEP anytime before April 18, 2017.
2. Saver’s tax credit
Even if you have a Roth IRA or are already saving in an employee-sponsored retirement plan, there is another tax credit you can receive called the Retirement Savings Contributions Credit.
This tax credit is available to people who are age 18 or older, not a full-time student and not claimed as a dependent on another person’s return. According to the IRS, “The amount of the credit is 50%, 20% or 10% of your retirement plan or IRA contributions up to $2,000 ($4,000 if married filing jointly), depending on your adjusted gross income,” and it can be used for your contributions to any of these retirement plans: Traditional or Roth IRA; your 401(k), SIMPLE IRA, SARSEP, 403(b), 501(c)(18) or governmental 457(b) plan; and your voluntary after-tax employee contributions to your qualified retirement and 403(b) plans.
3. Earned Income Tax Credit
According to the IRS, the following types of people qualify: If your Adjusted Gross Income (AGI) is less than $14,820 and you’re single, if you’re married filing jointly and your AGI is less than $20,330, or you have three or more kids, are married, and your AGI is no more than $53,267, you can qualify for this tax credit — which can be as much as $6,242!
If you want to know if you qualify, use this tool from the IRS to find out.
4. $1,000 child tax credit
This tax credit can reduce your tax bill by as much as $1,000 per child, but you have to meet 7 different requirements.
And just what are those requirements?
- The child must be under age 17 at the end of the tax year for which you’re filing.
- The child must be your own child or an adopted child, a stepchild, or a foster child placed with you by a court or authorized agency.
- The child cannot have provided half of his or her own financial support in the tax year.
- You must have claimed the child as a dependent.
- The child must be a U.S. citizen.
- The child must have lived with you for at least half the year for which you’re filing.
- Your modified adjusted gross income is above certain amounts: $55,000 for married couples filing separately; $75,000 for single, head of household, and qualifying widow or widower filers; and $110,000 for married couples filing jointly. The available child tax credit is reduced by $50 for each $1,000 of income above the limit.
5. Dependent care tax credit
If you are paying for child care expenses while you’re working, you could be in luck when it comes to taxes! Plus, you can claim this tax credit regardless of income.
With this credit, you can claim a child age 12 and under for the year the taxes will be filed, your spouse, if they are unable to care for themselves and lived with you at least half of the year, or another person who is claimed as a dependent by you and lived with you for at least half of the year.
The maximum amount of allowable care expenses is $3,000 for one child, or $6,000 for one or more children or people.
There are other requirements for this tax credit though, so be sure to consult the IRS’ website for all the details.
6. Mortgage interest deduction
If you own a home, interest paid on a mortgage is tax deductible if you itemize your deductions on your tax return.
According to the IRS, in most cases, you can deduct all of your home mortgage interest. This can include interest on a mortgage to buy your home, a second mortgage, or a line of credit to secure your home or home equity loan.
Bear in mind, mortgage interest is only deductible for a first or second home, not a third or fourth home. You can deduct mortgage interest up to $100,000, or $50,000 if you’re married and file separately.
7. American Opportunity Credit
Previously called the Hope scholarship credit, the American opportunity credit has been expanded and can be claimed through 2017.
For this tax credit, $2,500 of the cost of tuition, fees and course materials paid to a qualifying college or university during the taxable year can be can be credited. In addition, this credit can be claimed for expenses for the first four years of post-secondary education, amounting to a credit of $10,000!
According to the IRS, taxpayers will receive a tax credit based on 100% of the first $2,000, plus 25% of the next $2,000, paid during the taxable year for tuition, fees and course materials. But, you must have a modified adjusted gross income of $80,000 or less ($160,000 or less for joint filers) to claim this credit for an eligible student.
For more on this, visit the IRS’ website.
8. Lifetime Learning tax credit
The lifetime learning credit is an education credit of up to $2,000 for qualified education expenses paid for eligible students.
The great news is, there is no limit on the number of years this credit can be claimed. Since it is a credit, it reduces the tax you have to pay, versus a deduction, which reduces the amount of income subject to tax. But, if your credit is more than your tax, unfortunately the difference can’t be refunded.
Bear in mind that you cannot claim the American opportunity credit and the lifetime learning credit. You’d have to choose between one or the other.
9. Student loan interest tax credit
If your modified adjusted gross income (MAGI) is less than $80,000 ($160,000 if filing a joint return), you can deduct up to $2,500 in student loan interest. Plus, you can claim this deduction even if you don’t itemize deductions
10. Sales tax or state income tax deduction
From 2005 through 2014, the IRS has permited writing off state and local income tax or sales taxes when itemizing your deductions on your federal tax return. People who live in a state that does not require income taxes can benefit most from this deduction, but not always. If you made large purchases during the year, you might benefit from deducting sales tax on your tax return. But, keep in mind, you can’t deduct both.
11. Charitable contributions
If you want to give to charity, the IRS wants to encourage you to do so by reducing your taxable income if you give to a qualifying 501(c3) nonprofit organization.
As a general rule, you can deduct up to 50% of your adjusted gross income, thereby reducing your overall taxable income, but 20% and 30% limitations may apply in some cases. Donations made by December 31, of any calendar year are tax-deductible. See the section on charitable contributions on the IRS’ website for more information.
12. Loss on capital gains
According to the IRS, almost everything you own and use for personal or investment purposes is a capital asset, such as a home, household furnishings or stocks or bonds. If you sold any stock at a loss, you can deduct up to $3,000 against other income, and carry forward the excess to future years. But, there are several rules for understanding how to do this. Consult the IRS for more on capital gains.