Trump’s Last Warning
Dear Rich Lifer,
In his final hours as commander in chief, President Trump issued one last warning.
“I hope they don’t raise your taxes, but if they do, I told you so.”
President Biden has pledged to undo at least some of the Trump tax cuts.
He’s said numerous times he will raise taxes for those making more than $400,000 a year and increase the corporate income tax rate from 21% to 28%.
Taxes on long-term capital gains and dividends are also not off the table and we could see a rise to the estate and gift taxes.
Given the ambitious spending plans of the Biden-Harris administration, it’s more than likely we will see an increase in rates for all Americans, not just the ‘rich.’
2020 might have very well been the last year of low tax rates.
To ensure you take full advantage of these deductions and credits while you still can, we’re listing 10 tax breaks every middle- and lower-class family should be aware of.
If you’re not aware of these, you’re probably paying too much to the IRS. Here are 10 tax breaks you should know.
- Zero Tax on Capital Gains
Investors with lower taxable incomes pay no tax at all on capital gains and dividends. This is great news for retirees and anyone unemployed who may have had to tap investments to make ends meet last year.
To take advantage of the 0% capital-gains rate on your 2020 tax return, your taxable income can’t exceed $40,000 if you are single; or $80,000 if you are married filing jointly. Note this is only for taxable income, which is what’s left after you subtract itemized deductions or the standard deduction from your adjusted gross income.
The Earned Income Tax Credit (EITC) is an incentive for people to work. Originally conceived in the 1970s, this program has been expanded several times, with some states even creating their own versions.
Depending on your income, the max EITC ranges from $538 to $6,660. What makes it so popular is when the federal EITC exceeds the amount of taxes owed, you get a tax refund.
Income limits on this program are fairly low. If you have no kids, for example, your 2020 earned income and adjusted gross income (AGI) must each be less than $15,820 for singles and $21,710 for joint filers.
If you have three or more kids and are married, your 2020 earned income and AGI can be as high as $56,844. There are several exceptions, so check the Center for Budget and Policy Priorities online calculator to determine your eligibility.
- IRA Deductions
Anyone with earned income (not including investments) can contribute to a traditional IRA, but not everyone who contributes can claim a tax deduction. If you’re enrolled in a 401(k) or other work sponsored retirement plan, you might not be able to claim this deduction.
First, there’s a limit on how much you can contribute each year to your IRA — $6,000 for 2020 ($7,000 if you’re over the age of 50).
If neither you or your spouse participate in an employer retirement plan, there are no income limits for taking a deduction. You can deduct your IRA deposits no matter how high your income.
However, if you are enrolled in a retirement plan, IRA deductions are phased out as income rises to $65,000 and $75,000 for singles and between $104,000 and $124,000 for couples.
Spouses with little or no earned income can also make an IRA contribution of up to $6,000 ($7,000 if 50 or older) as long as the other spouse has enough earned income to cover both contributions.
- Saver’s Tax Credit
If you are single and have 2020 adjusted gross income of $32,500 or less, or you are married and have AGI of $65,000 or less, you should qualify for the Saver’s Tax Credit.
Part-time works who fall within the income limits should rejoice. Since you can claim a tax credit worth 10%, 20% or 50% of the first $2,000 ($4,000 for joint filer) you put in — so up to $1,000 for singles and $2,000 for joint filers.
The lower your income, the higher percentage you get back through the credit. Contributions to a workplace plan, like a 401(k) or 403(b), plus contributions to a traditional, Roth or SEP IRA, are eligible for this credit.
A few exceptions: Taxpayers under age 18, full-time students and those claimed as dependents on their parents’ returns are not eligible, regardless of their income. You’ll need to submit IRS Form 8880.
- Child Tax Credit
Do you know someone who had a baby? Tell them about this tax credit which will put $2,000 back in their pocket. The credit applies every year until the child turns 17.
You get the full $2,000 credit no matter when the child was born that year. Unlike a deduction that lowers your tax rate, a credit reduces your tax bill dollar for dollar. So the $2,000-per-child credit will reduce your tax bill by $2,000.
Single filers making over $200,000 (and $400,000 for joint returns), will not qualify. But it’s worth noting that for some lower-income taxpayers, the credit is “refundable” (up to $1,400 per qualifying child), meaning if the credit is worth more than your income tax liability, the IRS will issue you a check for the difference, as with the EITC.
- Credit for Child Care
If your children are younger than 13, you’re eligible for a 20% to 35% credit up to $3,000 in child-care expenses for one child or $6,000 for two or more. The percentage decreases as income increases.
Eligible expenses include the preschool, before- or after-school care, summer day camps, and the cost of a nanny.
You can also reduce child-care expenses if you participate in your employer’s flexible spending account for dependent-care expenses. With these accounts, money is deducted from your gross salary before income, Social Security and Medicare taxes. You can contribute up to $5,000 per year.
- Credit for Adult Dependents
If you take care of an elderly parent or college student, you can get a $500 tax credit for each of them. The IRS has a helpful tool to guide you through the qualifications.
And like the child-care credit, the Credit for Other Dependents disappears as income rises above $200,000 for single filers and $400,000 on joint returns. But there’s no limit on how many dependents you can claim, so long as they all qualify.
- American Opportunity Credit
Do you have a son or daughter going to college? This tax credit is offered up to $2,500 of college tuition and related expenses, excluding room and board.
The full credit is available to filers whose modified adjusted gross income is $80,000 or less ($160,000 or less for married couples filing a joint return). Single taxpayers with MAGI above $90,000 and married couples with MAGI above $180,000 are ineligible for the credit.
The American Opportunity Credit covers all four years of college. And if the credit exceeds your tax liability, up to 40% of it is refundable.
- Lifetime Learning Credit
Thinking of going back to school? The Lifetime Learning Credit is calculated as 20% of up to $10,000 of qualified expenses, so you can get back as much as $2,000 per year.
For 2020, the income limits for the Lifetime Learning Credit are $69,000 if single and $138,000 if married, and you can’t claim both this credit and the American Opportunity Credit for the same student in the same year.
- Charitable Deduction for Non-Itemizers
This last one only applies for your 2020 tax return. There’s a new “above-the-line” deduction up to $300 for cash donations to charity. Donations to donor advised funds and certain organizations that support charities don’t qualify for this tax break.
Typically, you should itemize on Schedule A to get a deduction for charitable donations. However for 2020, it’s the other way around — if you itemize, you can’t take this new deduction.
Generally, itemizers have higher incomes. So, this tax break is truly for middle- and lower-income Americans.
To a richer life,
The Rich Life Roadmap Team