Not many people get excited when it comes to filing their taxes. Especially if they are low income. However, there are some tips that may be able to help you if you are a low-income taxpayer! Not every tax tip on this list will be able to benefit your situation. However, they can be helpful to keep in mind.
Low-Income Tax Tips
The best way to get legit tax advice is by speaking to a professional. However, there are some tax tips that you can keep in mind when it comes time to file like:
- Use a Free Tax Preparation Service
- Benefit from the Earned Income Tax Credit (EITC)
- Contribute to Your Individual Retirement Account (IRA)
- Benefit from the Retirement Savings Contribution Credit
- Tax Credits for the Elderly and Disabled
Use a Free Tax Preparation Service
Many people don’t realize that there are actually tax preparation services that can help people for free! While there may be local opportunities near you, the internal revenue service (IRS) also provides options. There is the Volunteer Income Tax Assistance (VITA) program and the Tax Counseling for the Elderly (TCE) program. These programs can help by providing basic tax return preparations for free to qualifying individuals.
The TCE program can help people who are at least 60 years old (since it is designed for seniors). On the other hand, the VITA program can help people if they:
- Have a disability
- Make less than $57,000
- Speak very little English
Benefit from the Earned Income Tax Credit (EITC)
While this is a popular tax credit, many people don’t actually understand it! This tax credit is refundable. That means that even if it is more than what you owe in taxes, you will still get the funds! For example, if you owe $300 in taxes, but are eligible for a $1,200 EITC then you will receive the difference as your tax refund. That means in this case, you would get a tax refund of $900.
How to Qualify?
There are plenty of different ways to qualify for the EITC. One of the most common ways to qualify would be to have at least one eligible child. However, even though this is one of the most popular ways to qualify, that doesn’t mean that it’s the only way. Even those with no eligible children may be eligible too. Both your income level and family size will be what determines eligibility. If you have:
- 3 or more children that qualify then your income should not be more than $51,464 (or $57,414 if you are married and filing jointly)
- 2 children that qualify then your income should not be more than $47,915 (or $53,865 if you are married and filing jointly)
- 1 child that is eligible then your income should not be more than $42,158 (or $48,108 if you are married and filing jointly)
- 0 children that are eligible then your income should be no more than $21,439 (or $27,830 if you are married and filing jointly)
What is the Most That You Can Get?
The maximum credit amount that you can get depends on your situation. Not everyone will get the same amount! If you have:
- 3 or more children that are eligible then the maximum credit is $6,728
- 2 children that are eligible then the maximum credit is $5,980
- 1 child that is eligible then the maximum credit is $3,618
- 0 children that are eligible then the maximum is $1,502
Contribute to Your Individual Retirement Account (IRA)
Many low-income people don’t realize that they may be eligible to get an IRA deduction. The best part? This is still possible to get even if you and your spouse are covered by a retirement plan at work. Not everyone will be able to qualify since there are limits in place. These limits will affect your contribution’s deductibility (under specific circumstances). However, it is important to note that these limits are generally too high to have any real impact on a low income taxpayer.
Let’s look at an example! Let’s say that you are a single filer. As a single filer, you work at a company where you are currently covered by a retirement plan. You may still be able to deduct your total IRA contribution with an altered adjusted gross income (AGI). You may run into issues with your IRA deduction if you are married but are filing separately from your spouse. This opportunity can be especially hard to understand which is why you should speak to a tax professional. You can direct your questions to the free options that we mentioned above!
Benefit from the Retirement Savings Contribution Credit
It is recommended that people always keep a retirement fund into consideration. They can be encouraged to do this with the Retirement Savings Contribution Tax Credit! Qualifying low-income taxpayers can get credits for contributing to their retirement plan. Again, the maximum amount that a person can get varies based on their situation. They can get as low as 10% to as high as 50% of the first $2,000 that is put into a retirement plan like an IRA. Guidelines may change but for 2021, if your income is more than $33,000 (or $66,000 if you are married and filing jointly) then you wouldn’t be able to qualify for this option.
Tax Credits for the Elderly and Disabled
You may be able to get this tax credit if you are an eligible low-income disabled or elderly individual. There are requirements that you must meet which include:
- Staying within income limits (more on this down below)
- Having taxable disability income
- Being at least 65 years old by the end of the year
- Retiring on permanent (and total) disability
Just like the other tax tips on this list, there are limits that you need to be aware of. The limits for this credit state that a qualifying person’s AGI must not be at or over:
- $25,000 if you are married and filing jointly (when both spouses are eligible)
- $20,000 if you’re married and filing jointly (but only 1 spouse is eligible)
- $17,500 if you’re a single filer, head of house (there may be other qualifiers for this limit)
- $12,500 if you are married and filing separately (you must have also lived apart for at least one year)
Other disqualifiers can be the amount of nontaxable social securities, disability income, or pensions annuities. The limit varies based on the type of income but ranges from $3,750 all the way up to $7,500.
Being low income is already stressful enough. However, having to deal with taxes on top of that can be overwhelming. Luckily, that doesn’t have to be the case. In fact, those that are low income may be able to benefit during tax time. While the tips listed above are not applicable for every situation, they are something that you should keep in mind when handling your taxes. Talking to a professional will be your best bet in making sure that your taxes are done properly (and luckily there are ways you can get these services done for free!).