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9 Vital Tax Breaks You Probably Never Heard Of

Steve Pomeranz, Tax Breaks

We all like to complain about tax breaks for millionaires and companies with offshore subsidiaries—but guess what! In recent years, lawmakers have enacted dozens of tax incentives targeted at middle-class families, ordinary working men and women, and I want to make sure you take full advantage of each one relevant to your situation. These tax breaks are listed on one of my favorite websites, Kiplinger.com.

in recent years, lawmakers have enacted dozens of tax incentives targeted at middle-class families – for ordinary working men and women, and I want to make sure you take full advantage of each one that’s relevant to your situation

1. Saving for Retirement

Let’s begin with saving for retirement. Most of you know this. Anyone with earned income can contribute to a traditional IRA, but not everyone who contributes can claim a tax deduction.

Here’s how the deduction rules work for traditional IRAs. First, there’s a $5,500 limit on how much you can contribute each year for everyone below the age of 50, and that limit rises to $6,500 if you’re above 50 by the end of the tax year. Now if you’re working part-time and earn less than $5,500 annually, you can contribute 100% of your income up to the $5.500. I strongly urge you to contribute the full amount to minimize your taxes and get your savings going.

2. Save and Be Credited

Few know about a special tax break available to low and moderate income taxpayers who are saving for retirement. If you are single and make under $30,500 or are married and earn under $61,000, you can get a credit on your taxes by taking advantage of the Saver’s Tax Credit. A tax credit is a beautiful thing, because it comes right off your tax liability. This means that if your owe $2,000 and get a credit for $1,000, you end up owing $1,000, which is much better than a deduction against your income. The maximum credit is $1,000, so check with your tax preparer or tax software to see if you qualify.

3. Get Paid (More) for Working

For those of you making less than 15,000 if you’re single and $20,000 if you’re married and filing jointly, our government provides a tax incentive to reward you for working. It’s called the Earned Income Tax Credit. Here’s what makes this popular: If this tax credit exceeds the amount of taxes you owe, you get a tax refund—a check back to you. In essence, you’re no longer a taxpayer. But, here’s the deal. You MUST act to claim the credit by filing your taxes, a step many just don’t take, even though it’s not complicated.

For 2015, this tax credit ranges from $50 to $6,200, depending on your income and how many children you have. So if you aren’t making very much, this earned Income Tax Credit can sure help.

4. Your Child, Your Credit

For new parents, each new baby comes with a $1,000 child tax credit to lower and middle income earners and continues every year until your child turns 17. Remember, as I said before, a tax credit is a beautiful thing, because it comes right off of your tax liability. This credit begins to disappear as income rises above $75,000 on single and $110,000 on joint returns. There’s no limit to how many kids you may claim on a return, as long as they qualify.

5. Get Credit for That Child’s Care

You may also qualify for a tax credit that will reduce the cost of child care. If your children are younger than 13, you’re eligible for a 20-35% credit for up to $3,000 in child-care expenses for one child or $6,000 for two or more. Eligible expenses include the cost of a nanny, preschool, before or after school care and summer day camp.

Another way to reduce child care expenses is to participate in your employer’s flexible spending account for dependent care expenses. With these accounts, money is deducted from your gross salary ,and you can contribute up to $5,000 per year.

6. Zero Tax on Capital Gains

Let’s talk about Capital Gains. For most people, long-term capital gains (and qualified dividends) are taxed at 15 or 23.8%—a bargain by historical standards. But investors in the two lowest income tax brackets pay no tax at all on their capital gains and dividends. This could be a boon to retirees, who are not taxed on some or all of their Social Security benefits. This could also help if you’re unemployed and having to tap into your investments to make ends meet.

To take advantage of the 0% capital gains rate for 2015, your “taxable income” cannot exceed $37,450 if you are single, $50,200 if you are a single head of household with dependents, or $74,900 if you are married filing jointly. By the way, I’m rounding on all of the income numbers I’m giving today for the sake of simplicity, so for you accountants out there, please don’t take offense.

7. American Opportunity Credit

Another tax credit is available for college tuition and related expenses paid during all four years of college, excluding room and board. The full credit is up to $2,500 and available to individuals whose gross income is $80,000 or less or $160,000 or less for married couples filing a joint return. This is called the American Opportunity Credit.

8. Lifetime Learning Credit

If you want to get additional education for virtually any reason and at virtually any school, you can tap into the Lifetime Learning Credit, which is calculated as 20% up to $10,000 of expenses. The income limits for the Lifetime Learning Credit are $65,000 if single and $130,000 if married,

9. More Education Breaks

If neither the American Opportunity Credit nor the Lifetime Learning Credit works for you, there are still other ways the government offers favorable tax treatment for education to the middle class and below:

Got a student loan around your neck? You can deduct up to $2,500 of interest paid on the loan each year, as long as your income is less than $80,000 ($160,000 if filing a joint return). The former student can deduct this even if it’s actually Mom and Dad who are paying the bill.

And, finally, interest earned from investments in Series EE and I bonds issued after 1989 can be tax-free if that money is used to pay for qualified education expenses. So you can finally get a tax break on your bar mitzvah or confirmation money!

So if you qualify, I strongly urge you to file the necessary paperwork. It’s not that hard and, moreover, with online filing services from H&R Block and others, it’s a small price you pay to easily get the big check or tax break you deserve.

I've been an investment strategist and adviser for over 35 years, leading with a mission of unbiased advice to educate and protect listeners on my weekly radio show on NPR affiliates nationwide. I have been named a “Top 100 Wealth Advisor” by Worth Magazine and “Top Advisor” by Reuters.