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Tax Credits for Lower Income Taxpayers

Paying taxes is a painful ritual taxpayers must go through each year. However, the tax system is set up to take the sting out of paying taxes where lower income taxpayers are concerned.

Those with the lowest incomes are taxed at a rate of only 10 percent (as opposed to the top income tax rate of 35 percent). Also, low and moderate income taxpayers in the 10 and 15 percent income tax brackets pay zero long-term capital gains taxes on investments.

In addition, there are a number of tax credits that are available only to lower income or disabled taxpayers, including:

Earned Income Tax Credit (EITC)  

The Earned Income Tax Credit (EITC) is part of a federal tax program designed to help low income workers and families by offsetting the burden of Social Security taxes and providing an incentive to work.

If you or your spouse earned any taxable income for the year, you may be eligible for the EITC. The EITC is a refundable tax credit. This means that if your credit amount is higher than your tax bill, you can actually get the unused part of the credit back as part of a tax refund. 

If you qualify, it could be worth up to $6,044 for the 2013 tax year.

Even though it sounds too good to be true, it isn't. Unfortunately, the IRS estimates that only four out of five eligible taxpayers received their EITC last year. Being able to claim the EITC is a good reason to file a return. Claiming this credit on your tax return allows you to claim a refund even if you had no income to report in 2013.

According to the IRS, the main reason people fail to claim this important tax credit is because they simply don't know about it.

EITC Eligibility

If you or your spouse were employed for at least part of 2013, you may be eligible for the EITC based on these general requirements:

2013 EITC Eligibility - Earnings

 
Maximum Earnings   Qualifying Children  Investment Income 
Single  Married Filing Jointly
$14,340 $19,680 None Maximum $3,300
$37,870 $43,210 One Maximum $3,300
$43,038 $48,378 Two Maximum $3,300
$46,227 $51,567 Three or more Maximum $3,300


The amount of the EITC itself depends on your income and family size. For 2013, the maximum credit amounts are as follows:

2013 Maximum EITC Amounts

 
Number of Qualifying Children  Maximum Credit 
Three or more $6,044
Two $5,372
One $3,250
None $487


Based on tables provided by the IRS, the maximum credit amounts are phased in from the first dollar earned. The EITC phases out completely when the earning levels mentioned earlier are reached.

Determining Your Income for EITC

When figuring out your EITC, benefits you receive under an employer's disability retirement plan (providing pensions to workers who lose their jobs because of disability) are considered earned income until you reach minimum retirement age. According to the IRS, the minimum retirement age is considered the earliest age at which you could have received a pension if you were not disabled. The taxable disability payments you claim on line 7 of either Form 1040 or Form 1040A count toward qualifying for the EITC.

However, you should be aware that benefits such as Social Security Disability Insurance (SSDI), Supplemental Security Income (SSI) or military pensions are not considered earned income that qualify for the EITC. The same is true for payments you received from a disability insurance policy on which you paid the premiums. You or your spouse must have earned income to qualify for the EITC.

Crunch the Numbers

There are several ways to determine EITC eligibility and the actual amount of the credit.

  • The hard way is to work through the worksheets and tables provided in the instructions to IRS Forms 1040, 1040A or 1040EZ.
  • An easier way is to use the EITC Assistant tools provided by the IRS that walk you through the entire process. If you elect to do so on your tax return, the IRS can also figure out your EITC for you.
  • If none of these choices work for you, seeking professional tax help is highly recommended because of complexities involved.

Saver's Credit 

For those struggling with the financial hardships caused by a permanent disability, putting away money for retirement may seem like a tough thing to do. However, the reality is that you will need money in later years as well (perhaps even more so then today).

The good news is that there is a way for the federal government to add to your private retirement nest egg through a special tax credit called the Saver's Credit. This credit is available only to lower income taxpayers.

Based on the most recent information available, taxpayers claimed more than $1.1 billion in Saver's Credits on nearly 6.4 million individual income tax returns. The average savings for those filing jointly was $215.

Eligibility for the Saver's Credit

Provided you or your spouse have any earned income, the Saver's Credit helps offset part of the first $2,000 workers voluntarily contribute to IRAs and to 401(k) plans and similar workplace retirement programs. This credit can be claimed by:

•    Married couples filing jointly with incomes up to $59,000 in 2013 or $60,000 in 2014
•    Heads of Household with incomes up to $44,250 in 2013 or $45,000 in 2014; and
•    Married individuals filing separately and singles with incomes up to $29,500 in 2013 and $30,000 in 2014.

What You Can Save From Saver's Credit

The maximum Saver's Credit is half of the first $2,000 saved in a retirement account.

  • This means a tax savings up to $1,000 for a single taxpayer earning $17,750 or less in 2013 and up to $2,000 for married couples earning $35,500 or less. (This savings is in addition to any other tax savings for contributing towards retirement.)
  • It is important to note that the Saver's Credit amount decreases when earnings are above $17,750 for single taxpayers and $35,500 for married couples. This credit is phased out completely above the income levels listed earlier (e.g. $59,000 for married couples in 2013).

To see how this works, take a look at the following example.

Example:
Jack and Jill Hill are married and file jointly. Jack is permanently disabled after a fall and had no earned income or disability income yet in 2013. Jill is employed and earned $29,000 in 2013. Jill also contributed $2,000 to an individual retirement account for the year.

After doing the number crunching on IRS Form 1040, Jill's IRA contribution results in the following tax savings for the couple:

  • Their combined taxable income is reduced by $2,000 resulting in a tax savings of $435.
  • After taking the standard deduction and tax exemption amounts, their tax bill comes to $913.
  • Their Saver's Credit comes to $1,000 (half of $2,000).
  • Since their taxes are less than the Saver's Credit, their taxes owed falls from $913 to zero.
  • Their total savings for contributing $2,000 towards their retirement savings is $1,348.

Based on the above example, the couple essentially gets back 67.4 percent of the amount they set aside for retirement. Although the idea of parting with $2,000 may be hard to take and your results may vary depending on your income and deductions, where else can you get a deal like that?

How to Claim the Saver's Credit

To figure out and claim the Saver's Credit, use IRS Form 8880, Credit for Qualified Retirement Savings Contributions.

 

Credit for the Disabled  

If you receive taxable disability income through your former employer's accident, health or pension plan, the Credit for the Elderly or the Disabled may reduce the amount of taxes you owe on it. You may be able to take this credit if your 2013 adjusted gross income is under:

  • $17,500 if filing single
  • $20,000 if filing jointly and only one spouse is eligible for the credit
  • $25,000 if filing jointly and both spouses are eligible
  • $12,500 if married filing separately

Eligibility for the Credit for the Elderly or the Disabled

To qualify for this credit, your taxable disability income must meet both of the following requirements:

  • It must be paid under your former employer's accident, health or pension plan; and
  • It must be included in your income as wages during your absence from work due to a permanent and total disability.

What You Can Save with the Credit for the Elderly or the Disabled

The maximum amount of the potential credit depends on your filing status. For those on permanent and total disability, the maximum credit amounts are as follows:

2013 Maximum Disabled Credit

 

Filing as single, head of household or qualifying widow(er)

$5,000

Married filing jointly with one spouse under 65 and retired on permanent and total disability

$5,000

Married filing jointly with both spouses under 65 and retired on permanent and total disability

$7,500

Married filing a separate return

$3,750


Please note that amount of the credit cannot be more than your taxable disability income. Also, be aware that the non-taxable part of your Social Security benefits factors into your credit calculation.

How to Claim the Credit for the Elderly or the Disabled

Calculating this credit is not easy. To figure out and claim the credit for the disabled, use IRS Schedule R (Form 1040), Credit for the Elderly or the Disabled, or IRS Schedule 3 (Form 1040A).

However, you can choose to have the IRS figure this credit for you. Just follow the instructions on the forms as to how to do this.

Additional Resources

Depending on your particular situation, there may be many more tax breaks that can take the sting out of filing your taxes and even help your financial situation in the end. To take full advantage of these tax breaks, learn about the resources available to help you with your taxes.