When people discover that there are ways to reduce taxes, they often assume that those ways are geared only toward high-income taxpayers. But there are tax credits available to low-income taxpayers that can help reduce their tax burden and make a positive difference in their financial lives. Let’s take a look at seven of them. First, let’s clarify the difference between a tax credit and a tax deduction. Tax credits are a dollar-for-dollar reduction of your tax bill while a deduction just reduces your taxable income. For example, a $1000 tax credit will actually reduce your tax bill by $1,000 (i.e., a $5000 tax bill would be reduced to $4000). A $1000 deduction, on the other hand, would reduce your taxable income (i.e., from $50,000 to $49,000) resulting in an actual tax savings of approximately $100-$300, depending on your tax bracket.
The Savers Credit
It’s difficult to save for retirement when your income is low, but if you do you can qualify for this special tax credit that gives an additional tax break on the first $2,000 contributed to a retirement account such as a 401(k), IRA, 403(b), etc.
American Opportunity Credit
Formerly known as the Hope Credit, this offers a credit for money spent on certain college expenses.
Earned Income Tax Credit
Individuals who meet the income requirements can qualify for this credit, which reduces their overall tax liability and can result in a refund. In some cases, taxpayers can qualify for a refund that exceeds the amount they paid in taxes.
Lifetime Learning Credit
Allows up to $2,000 in tax credits for certain education expenses. Cannot be used in conjunction with the American Opportunity Credit.
Child and Dependent Care Credit
This credit is for the cost of paying someone to care for your child or dependent. When you qualify, you can get a credit equal to as much as 35 percent of your qualifying child or dependent care expenses, as long as the provider meets qualifications. Note that the care must be given to a child under 13 or to a dependent who is physically or mentally incapable of caring for him or herself.
Credit for the Elderly or the Disabled
Qualified individuals who are 65 or older or who have a permanent disability may qualify for this special tax credit.
Child Tax Credit
Taxpayers with qualifying dependent children may qualify for up to $1,000 in tax credits per child. This credit can be taken along with the child and dependent care credit.
We recommend you consult with your tax advisor to see if you qualify for any of these credits.
Although this information has been gathered from sources believed to be reliable, it cannot be guaranteed and the accuracy of the information should be independently verified. This material is intended for informational purposes only and should not be construed or acted upon as individualized investment advice. Neither Kramer Wealth Managers, nor Osaic Wealth, offer tax or legal advice. Federal tax laws are complex and subject to change.
