A Guide to Tax Breaks for the Middle Class
The past year has been full of events with major economic impact--from the fiscal cliff to the budget sequester--with possible effects on middle class taxpayers. Fortunately, even as Washington lawmakers continue to debate these issues, there are plenty of tax breaks that middle-income earners may be eligible for this tax season. Here are some you should be aware of:
Earned Income Tax Credit (EITC). The Earned Income Tax Credit is an important tax break for moderate income earners and can be worth up to $5,891. To qualify during the 2012 tax year, your earned income and your adjusted gross income, or AGI (the sum total of all of your earnings less certain deductions), must be less than:
-- $45,060 ($50,270 married filing jointly) with three or more qualifying children
-- $41,952 ($47,162 married filing jointly) with two qualifying children
-- $36,920 ($42,130 married filing jointly) with one qualifying child
-- $13,980 ($19,190 married filing jointly) with no qualifying children
Families with children benefit the most from this credit, but even those without kids can qualify, as long as their income is less than $13,980.
Retirement savings. If you've been building up your nest egg and have low or moderate income, the IRS could reward you with up to $1,000 ($2,000 if married and filing jointly) with the Retirement Saver's Credit to help you save for your future. Contributions to investment accounts for retirement, such as an IRA, Roth IRA, 401 401(k), 403(b), 457(b) and other voluntary contributions, could help you meet the requirements to receive this credit.
On top of that, keep in mind contributions made to some retirement plans also count as tax deductions, so you're basically double-dipping in the tax savings; it makes saving for retirement a no-brainer.
You can make your contribution to your IRA this year, up until the tax deadline, April 15, and still reap the benefits of the Retirement Saver's Credit and the deduction for your contribution to your IRA on your 2012 tax return.
Dependents and childcare deductions. Many forget children are one of the biggest tax deductions available. In 2012, you can claim a personal exemption deduction of $3,800 for each dependent child or other dependent, such as an elderly relative you care for. The exemption reduces the amount of your income subject to federal tax.
In addition, the Child Tax Credit is a $1,000 credit you may be able to claim for each child under 17. However, there are income limitations: Married couples with a household income of more than $110,000, or $75,000 for a single parent, can't claim this credit.
Childcare can be deductible, too. If you're working or actively seeking employment and pay for childcare for a dependent younger than 13, you may be able to claim the Child and Dependent Care Credit. The credit provides a dollar-for-dollar reduction of taxes based on childcare expenses, up to 35 percent of $3,000 for one child or $6,000 for two or more children. Based on your income, the credit ranges from 20 to 35 percent of your childcare expenses and can be worth up to $1,200. Qualifying expenses include nursery school, afterschool programs, and daycare.
Education. The American Opportunity Tax Credit enables full- and part-time college students to receive a partial refund for money spent on tuition and other education-related fees up to a maximum of $2,500 credit per individual. The credit applies to the first four years of post-secondary education.
The Lifetime Learning Credit is available to students who paid expenses related to qualified post-secondary education, whether it was a four-year program or not. Like the American Opportunity Tax Credit, this credit can be claimed for tuition or enrollment expenses, as well as for required books or equipment if you paid the school directly for them. The maximum credit available is $2,000 per household.
The bottom line: The middle class have a number of opportunities to see more money come back in their tax return--they just need to take advantage of them.
Lisa Greene-Lewis, Lead CPA, American Tax & Financial Center at TurboTax, has more than 15 years of experience in tax preparation, including positions as a public auditor, controller, and operations manager. For up-to-date tax tips and tax news, go to the TurboTax Blog.
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