Sunday, July 23, 2006

Tax Breaks For The Underpaid

There are a few nice things about being underpaid - it can be SUCH a hassle to keep up with the maintenance on a vacation home. The docking fees for yachts can be ridiculous sometimes, really. But you also get some nice tax breaks which those with fatter wallets can't claim.

Free Federal Tax Filing
This isn't strictly a tax break, but it will save you some money. If you have an adjusted gross income below $50k a year, you can file your federal taxes for free online through the IRS Free File program. If you go through the IRS site, you can use the nifty services of H&R Block, Turbotax, TaxACT, and many others for free. State taxes aren't free, but it'll be a lot easier to fill them out once you've completed your federal taxes and have that nice, clean PDF to work with.

The Earned Income Tax Credit
This is simply a credit for individuals who have fairly low income, and you're more likely to be eligible if you have dependents. You have to be between 25 and 65 unless you have a child, and you can't use this credit if you're someone else's dependent.

From the IRS EITC page: Earned income and adjusted gross income (AGI) must each be less than:
  • $36,348 ($38,348 married filing jointly) with two or more qualifying children;
  • $32,001 ($34,001 married filing jointly) with one qualifying child;
  • $12,120 ($14,120 married filing jointly) with no qualifying children.

  • Tax Year 2006 maximum credit:
  • $4,536 with two or more qualifying children;
  • $2,747 with one qualifying child;
  • $412 with no qualifying children.

  • Investment income must be $2,800 or less for the year.

    Credit for Qualified Retirement Savings Contributions (form 8880)
    If your modified adjusted gross income is less than $25,000 ($50,000 married filing jointly) you can actually get up to half of the money that you voluntarily put into retirement accounts (like a 401(k) or 403(b) or 457 or any kind of IRA) back as a tax credit. For singles, this starts at a 50% return if you're under $15k a year, and peters out to 10% between $16,500 and $25,000 for 2006. People filing as head of household get a more generous table. This doesn't count for any money that you didn't voluntarily contribute (such as a required contribution to a pension plan, or money your employer contributed) but it's a nice little break. Just think, contributing to your 401(k) pre-tax brings down your taxable income, so the more you contribute, the more you could get back if it pushes you down into a lower bracket. You must not be someone else's dependent or a full time student to take this credit. For more information, see page 90 of the IRS's booklet on IRAs (Publication 590).

    Education Credits
    The Hope Credit is for the first two years of school; the Lifetime Learning Credit can be used for any year you take any classes for any reason. You can't be someone else's dependent, but if someone else paid the tuition, either one of you can take the credit. These credits are only available in full if your AGI is below $43,000, and are totally gone if your AGI is above $53,000.

    For the Lifetime Learning Credit:
  • Applies to undergraduate, graduate and professional degree courses, including instruction to acquire or improve job skills.

  • If you qualify, your credit equals 20% of the first $10,000 of post-secondary tuition and fees you pay during the year, for a maximum credit of $2,000 per tax return.

  • For the Hope Credit:
  • Applies only for the first two years of post-secondary education, such as college or vocational school. It does not apply to graduate and professional-level programs.

  • It can be worth up to $1,500 per eligible student, per year.

  • You're allowed 100% of the first $1,000 of qualified tuition and related fees paid during the tax year, plus 50% of the next $1,000.

  • Each student must be enrolled at least half-time for at least one academic period which began during the year.

  • So if you take a class paid for by your employer that costs $4,000, your credit under the Lifetime Learning Credit is 20% or $800. For more details see Publication 970 or this page at the IRS.

    Deducting Moving Expenses
    This one's available to almost everyone, but if you've got a lower income, the cost of moving could be a pretty hefty percentage of what you make. If you're moving more than 50 miles for a job, you can deduct mileage, the cost of storage, truck rentals, and more. Check out Publication 521 to see what you can deduct.

    Student Loan Interest Deductions
    This deduction is available on loans taken out in 1998 and after. You can deduct up to $2,500 of the interest you paid on your student loans during the year. You can take the full deduction if your AGI is under $50,000, and you lose the deduction entirely above $65,000. Chapter 4 of Publication 970 will tell you all you need to know. Especially in the early years of paying down your student loans, you can pay quite a lot of interest, and this can help lower your taxable income a lot. Maybe then you'll qualify for a bigger rebate on your retirement contributions!


    Empty Spaces Inc. said...

    you forgot to mention a deduction for the cost of job hunting!

    KMK said...

    Thanks so much for the info on student loan interest deductions. I have been asking around among my friends, and no one knew the cut off or how to find out what could be claimed!

    Kay said...

    Nice post. I included it in Carnival of Taxes #3: " ... PennyFoolish toes the tax-law line in her Tax Breaks for the Underpaid. She's part of Under 30 Honor Roll, a group of younger personal finance bloggers who formed a network to support one another's financial improvement efforts. As one who could be the, shall we say, older sister of this group, I say way to go! Even if you're in my demographic, check out this list because many of us, regardless of age, are underpaid and can take advantage of these tips. ... "