Let Uncle Sam Pay Part Of Your 2013 Taxes

A couple of weeks ago, I wrote about new tax laws that may affect higher-income households.  In the spirit of equal time, I’d like to talk about tax benefits that traditionally help those with lower incomes. Specifically, I’m talking about tax credits. 

Tax credits reduce tax liability dollar for dollar and for some taxpayers, may reduce their tax liability to zero.  In fact, if the tax credit is “refundable,” taxpayers may even get back more than they owe.  Since many tax credits have an income limitation, this form of tax break generally favors lower-income households. Here is an overview of some of the more common tax credits for 2013, along with what you need to know before attempting to claim them:

The Earned Income Tax Credit

If your adjusted gross income (AGI) is less than $51,567 ($46,227 if single), you may qualify for this refundable tax credit aimed at people who work but don’t earn a lot of money.  The amount of the credit is based on your filing status and the number of children, if any, in your household.  Taxpayers eligible for the full credit can reduce their tax liability (and possibly increase their tax refund) by as much as $6,044. To determine your eligibility for, and the amount of, this tax credit, you can use the EITC Assistant tool or the EIC worksheet found on page 56 of the Instructions to Form 1040, or you can elect to have the IRS calculate it for you (see page 18 of IRS Publication 596, Earned Income Credit).

The Child and Dependent Care Credit

If you have children under age 13—or a disabled spouse or dependent—you may be eligible for a tax credit of up to 35% of the cost of child and dependent care expenses if the care is needed so you (and your spouse if filing jointly) can work or look for work.  The tax credit is based on your AGI and the amount of qualifying expenses incurred.  Qualifying expenses are limited to $3,000 a year ($6,000 if two or more qualifying persons are cared for) and are reduced by any benefits paid from a flexible spending or similar pre-tax arrangement. For more information on the child and dependent care credit, see IRS Publication 503, Child and Dependent Care Expenses.

The Child Tax Credit

If you have children under the age of 17, you may be eligible for a tax credit of up to $1,000 for each qualified child. The child must be under age 17 for the entire year, and the $1,000 credit begins to phase out when your modified adjusted gross income (MAGI) exceeds certain levels: $110,000 for married filing jointly, $75,000 for single, head of household, or qualifying widow(er), and $55,000 for married filing separately. Unlike nonrefundable tax credits, which are limited to your tax liability, any unused portion of the child tax credit may be picked up by the additional child tax credit.  That means certain taxpayers will get a refund of the unused child tax credit even if they don’t owe any tax. The IRS offers this Interactive Tax Assistant tool to help you answer tax questions like the amount you can claim in child tax credits.  For additional information, check out IRS Publication 972, Child Tax Credit.

The Saver’s Credit

If you are like many Americans, then you are probably putting aside money for retirement.  Did you know that if your AGI is $59,000 ($29,500 if single) or less in 2013 those contributions to a retirement account could qualify you for a tax credit of as much as $2,000?  The Retirement Savings Contributions Credit (commonly referred to as the Saver’s Credit) allows you to claim a tax credit for up to 50% of your contributions to a retirement plan.  The lower your income and the more you save for retirement, the higher your tax credit may be. (For purposes of determining your tax credit, do NOT include employer contributions.)  IRS Publication 590, Individual Retirement Arrangements (IRAs), contains more information on this jewel of a tax credit for lower-income households.

The American Opportunity Tax Credit and the Lifetime Learning Tax Credit

If you paid qualified education expenses for you, a spouse, or a qualified dependent (even if the money came from a loan) you may be eligible to claim either of these tax credits to offset the cost of higher education. Qualified expenses generally include those used to pay for tuition and fees, but not room and board.  Also, do not include expenses paid for with funds from a qualified tuition program such as a 529 plan or Coverdell Education Savings Account.

If your MAGI is below $180,000 ($90,000 if single) you may be eligible to claim the American Opportunity Tax Credit.  This credit is equal to 100% of the first $2,000 of qualified education expenses, and 25% on the next $2,000 of qualified education expenses, not to exceed a maximum credit of $2,500.  This credit may be claimed during the first four years of the student’s post-secondary education.

If your MAGI is below $127,000 ($63,000 if single) you may be eligible to claim the Lifetime Learning Tax Credit.  This credit is equal to 20% of the first $10,000 of qualified education expenses, not to exceed a maximum credit of $2,000.  This credit may be claimed in any year the student receives post-secondary education.

You may not claim both credits in the same year for the same student, and you may not claim a tuition and fees deduction in the same year you claim a tax credit.  You must complete Form 8863, Education Credits, and file a tax return to claim the credit.  You can use the same Interactive Tax Assistant tool or IRS Publication 970, Tax Benefits for Education, to see which credits, if any, you qualify for.

As you can see, the federal government has built in certain tax benefits to assist taxpayers with funding education, retirement, and the cost of raising a family.  One more benefit you should look into is the Free File program, which provides free tax preparation software to taxpayers that have income below $58,000.  No one likes to pay more in income taxes than they have to—be sure that you don’t by taking advantage of all of the tax breaks you are eligible to receive.

 

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