How Low-Income Individuals Can Save on Taxes

My recent explanation on How the Superrich Don't Pay Taxes elicited a lot of questions and responses on more ways Americans can escape paying high taxes.

But there were also many questions about the folks at the other end of the spectrum, the ones who pay no income tax, aren’t always required to file and qualify for many tax credits--the biggest of which is the Earned Income Tax Credit. The tax credit is offered to low-income earners, and in some circumstances, the EIC is more than the filer’s total income tax bill—providing an income refund to those that don’t have income tax taken out of their paychecks. According to the IRS, 49% of Americans pay no income tax whatsoever.

How does this work?

Credits offered to low-income taxpayers are not as fancy as foreign tax credits. Some of these credits aren’t applicable to taxpayers in middle or upper-income brackets. And again, these are credits against tax liabilities not deductions against income. Here are the credits available to those in lower income tax brackets:

1. Dependent and child care credit maxes out at $600 and is available to those with earned income, and there is no limit on the amount of income.
2. Child Tax Credit – up to $1,000 for each qualifying child as long as your adjusted gross income is less than $110,000 (married filing jointly), $75,000 (single, head of household or qualifying widow(er) or $55,000 if married filing separately. If you have more credit than tax to apply it against, you will get a refund of the remainder.
3. Retirement Savings Contribution credit is available to those making less than $28,250 if single, $42,375 if head of household, and $56,500 if married filing joint. You do not qualify if you are married filing separately.
4. Residential energy property credit up to 30% of cost. Income is not limited, but the credit amounts max out depending on the product installed.
5. Adoption credit is a refundable credit that applies to expenses for adopting a child. If your modified adjusted gross income (AGI) is more than $185,210, your credit is reduced. If your modified AGI is $225,210 or more, you will not get the credit.
6. Health Coverage Tax Credit available to all no income limits but don’t think you missed this on your tax return. You must be a TAA (Trade Adjustment Assistance) recipient to qualify
7. Credit for prior year Alternative Minimum Tax is available to those who were required to pay the AMT in prior years. Yes, if you paid into it, you may be able to recoup some of it in subsequent years
8. Education credits in the form of the American Opportunity Credit and the Lifetime Learning Credit come into play unless you can actually afford to send your kid to college. Then you’ve likely made too much money to enjoy the credit. It’s something of a conundrum.
9. Mortgage Interest Credit is for a low income individual who is able to purchase a home through a special program in which you receive an Mortgage Credit Certificate (MCC) from your state or local government.
10. Earned Income Credit – as I said before, this one is the biggie, the one that brings the number up of those who do not have to pay income taxes. Your income must be $43,998 ($49,078 if married filing jointly) and have three qualifying children, $40,964 ($46,044 married filing jointly) if you have two qualifying children, $36,052 ($41,132 for married filing jointly) if you have one qualifying child, and $13,660 ($18,740 for married filing jointly) if you do not have a qualifying child. You must have less than $3,150 in investment income. For 2011 you may receive as much as $5,666.

What happens is that the ultra rich and the ultra poor receive all the benefits of tax loopholes. The Americans in the middle are the ones with the wide shoulders.  

Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, CA and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook.