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3 Tax Credits Middle-Class Households Should Know About

Maurie Backman, The Motley Fool

Being middle-class in America often means getting stuck in a financial rut. You're not earning enough to really get ahead, but you're not entitled to some of the benefits lower earners are privy to. But here's some good news: If you're in a middle-income household, there are a number of valuable tax credits you might manage to snag.

As a quick refresher, a tax credit is a dollar-for-dollar reduction of your tax liability. Tax deductions, by contrast, exempt a portion of your income from taxes, but they don't directly lower your tax burden the way credits do. With that clear, here are three tax credits you might benefit from this year.

Couple with worried expressions looking at papers with calculators nearby

IMAGE SOURCE: GETTY IMAGES.

1. The Child Tax Credit

If you have children under the age of 17 in your household, you may be eligible for the Child Tax Credit. Prior to the 2018 tax year, this credit was worth up to $1,000 per qualifying child, but effective in 2018, it's worth up to $2,000 per child. And if you're a middle earner, you should have no problem snagging the full $2,000, since the credit only begins to phase out for single tax filers earning more than $200,000, or joint filers earning more than $400,000.

Another good thing about the Child Tax Credit is that up to $1,400 of it per child is refundable. This means that if you owe no tax, the IRS will pay that sum back to you.

2. The Earned Income Tax Credit

If you're a middle earner without children, you may not qualify for the Earned Income Tax Credit, or EITC. But if you have children, you might be eligible for up to $6,431 back from the IRS. Here's what the EITC income limits look like for the 2018 tax year:

Tax Filing Status

No Qualifying Children

1 Qualifying Child

2 Qualifying Children

3 or More Qualifying Children

Single, head of household, or widowed

$15,270

$40,320

$45,802

$49,194

Married filing jointly

$20,950

$46,010

$51,492

$54,884

DATA SOURCE: IRS.

Therefore, if you're married filing jointly and have a $52,000 income, but also have at least three children, you may be entitled to a nice chunk of cash once you file your taxes. Here's what the EITC might pay you, depending on the number of qualifying children you can claim:

Number of Qualifying Children

Maximum EITC Value

0

$519

1

$3,461

2

$5,716

3

$6,431

DATA SOURCE: IRS.

Furthermore, the EITC is fully refundable, which means the IRS will pay you back as much as you're owed under it.

3. The Child and Dependent Care Credit

One thing so many middle-class households struggle with is child care costs. Thankfully, you might get a bit of relief in the form of the Child and Dependent Care Credit, which you're allowed to claim if you pay for child care in order to work or even look for work.

Now, there are a few things you should know about the Child and Dependent Care Credit. First, it applies to children under the age of 12 who you also claim as a dependent on your tax return. Secondly, you must have paid someone other than your spouse, ex-spouse, or child to watch the child for whom you're claiming the credit. In other words, if you're married and your spouse stays home and watches your kids, you can't "pay" your spouse and then ask the IRS for some of that money back.

However, if you do legitimately pay an outside person or business for child care, you can claim up to 35% of up to $3,000 in costs for a single child, or up to 35% of up to $6,000 in costs for two or more children. That last statement probably made your head spin, but here's how it works: If your income is below $15,000, you can claim up to 35% of your costs of up to $3,000 for one child, or $6,000 for two or more kids. That percentage then falls by 1% for each additional $2,000 of earnings you bring in until it's reduced to 20% for an income of $43,000 or more.

Now let's say you earn $45,000 a year but pay $10,000 for child care for your two children. In that case, you can deduct 20% of $6,000 (not the whole $10,000) for a total of $1,200, which may not be optimal given your out-of-pocket expenses, but is certainly better than nothing.

It's not easy being middle-class, but if that's the boat you're in, be sure to pursue whatever tax breaks you're entitled to. The more savings you're able to eke out, the better.

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