Here’s How to Maximize Tax Deductions and Credits for Individuals Earning Under $50,000

Learn how to utilize free filing programs, access the Earned Income Tax Credit, and claim childcare expenses.

PUBLISHED MAR 25, 2024

Cover Image Source: Maximizing tax benefits (representative image) Unsplash | Photo by Kelly Sikkema

As tax season unfolds, individuals across the nation are navigating the complexities of filing their returns. For those earning under $50,000 annually, maximizing deductions and credits can significantly lower their tax bill. However, it's important to note that not being required to file taxes shouldn't dissuade individuals from doing so, especially if they could benefit from a refund, particularly following the holiday season. These include eligibility for various tax credits and benefits, such as the First-Time Homebuyer Credit, the Health Coverage Tax Credit, or the Earned Income Tax Credit. Overpayment of estimated tax, eligibility for federal fuel tax credits, and taxes withheld from paychecks are also potential reasons to file for a refund. Additionally, individuals may qualify for credits such as the American Opportunity Credit, the Child Tax Credit, or the Adoption Tax Credit. Moreover, those eligible to claim the Credit for Prior Year Minimum Tax should also consider filing their returns to explore potential refunds and benefits. Here are three essential tips to consider when filing taxes.

Taxpayers are rushing to meet the deadline for filing their taxes | Getty Images | Photo by Justin Sullivan

1. Utilize the Free File Program

The IRS Free File program offers a valuable opportunity for individuals earning $79,000 or less to file their taxes electronically, free of charge. This initiative not only streamlines the filing process but also ensures quicker receipt of tax refunds. With direct deposit as the chosen payment method, refunds are processed within 21 days. Taxpayers can conveniently track the status of their refund using the IRS's Where’s My Refund? tool.

2. Explore Earned Income Tax Credit (EITC)

One of the most impactful ways to reduce tax liability is by claiming the Earned Income Tax Credit (EITC). Designed to support low-to-moderate-income workers, this refundable credit ranges from $600 to $7,430 depending on eligibility criteria. To qualify, individuals must meet specific requirements, including having earned income below designated thresholds and possessing a valid Social Security number. The amount of credit varies based on the number of qualifying children and annual income.

Eligibility requirements

Annual income must fall below set thresholds, which stand at $56,838 for individuals and $63,398 for married taxpayers filing jointly. Additionally, investment income must be less than $11,000 for the tax year 2023. Possession of a valid Social Security number is mandatory and applicants must either be U.S. citizens or hold status as year-round resident aliens. Individuals filing Form 2555 for foreign-earned income are ineligible for the EITC.

Tax filing (representative image) | Unsplash | Photo by Olga DeLawrence

Maximum credit amount

The maximum credit amounts vary based on the number of qualifying children. For individuals without qualifying children, the maximum credit is $600. Those with one qualifying child can receive up to $3,995 while taxpayers with two qualifying children may claim a maximum credit of $6,604. Individuals with three or more qualifying children are eligible for a maximum credit of $7,430.

Adhering to these eligibility requirements enables individuals to access the EITC, providing vital financial support to low-to-moderate-income workers and families.

3. Claim Child and Dependent Care Credit

Individuals with low incomes may be eligible for the Child and Dependent Care Credit, offering deductions for childcare expenses. This credit allows taxpayers to claim between 20% and 35% of childcare costs, up to specified limits. The percentage claimed depends on the taxpayer's income level, with higher percentages available to those with lower incomes. Eligible expenses include childcare costs for children under 13 years old, up to $3,000 for one child or $6,000 for two or more children.

The percentage of the Earned Income Tax Credit (EITC) that individuals can claim is income-based, with varying rates depending on their annual income. For those earning $15,000 or less, the percentage they can claim is 35%. Conversely, individuals with incomes of $43,000 or more are eligible to claim 20% of the credit.