If you're the head of a low-income household or one of moderate income, tax season probably isn't your favorite time of year, to say the least. For millions of Americans like you, the weeks leading up to April 15th can evoke an all-too-familiar mix of anxiety and dread. That's in part because low- to moderate-income individuals and families frequently face greater barriers to securing advantageous tax rates, including having the financial knowledge or resources that might help them get ahead.
The good news is that with a little organization and resourcefulness, tax season doesn't have to add to your stress levels. In fact, it's actually your chance to claim crucial refunds that can bolster your financial stability. You can do this by maximizing your returns and minimizing your tax liability (what you owe at the federal, state, or local level).
Here are some tips and tax strategies that can make your annual filing work to your advantage.
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Keep your Financial Documents Organized
Maintaining organized financial documents is crucial for filing your taxes quickly and accurately as it simplifies the process and ensures you can legally claim deductions and credits. It minimizes the risk of errors, potentially saving time and money in the long run. Properly stored and organized records are also helpful in addressing any future inquiries from tax authorities, should they arise.
Understand the Earned Income Tax Credit (EITC)
The Earned Income Tax Credit (EITC) is a cornerstone of savings for low- to moderate-income taxpayers: it's designed to reduce tax liability and potentially result in a refund. Eligibility for the EITC hinges on income levels, filing stats, and whether the taxpayer has qualifying children. The IRS highlights the EITC as a powerful tool for those who meet the criteria, emphasizing its role in alleviating tax burdens.
Maximize Other Tax Credits
In addition to the EITC, several other tax credits are vital for taxpayers in lower income brackets:
- Child Tax Credit. The Child Tax Credit offers a significant education for each qualifying child, directly reducing the amount of tax owed.
- Child and Dependent Care Credit. This allows taxpayers to claim expenses related to child care, enabling heads of households to work or search for jobs.
- Education Credits. Consisting of the American Opportunity Credit and the Lifetime Learning Credit, these benefits support expenses for higher education.
- Saver's Credit. The Saver's Credi encourages building retirement savings by offering a credit for contributions to retirement accounts.
These credits can not only reduce your total tax liability for the year but can also lead to substantial refunds, providing a financial boost to households that qualify.
Consider Strategic Deductions
Tax deductions lower your taxable income, potentially placing you in a lower tax bracket. Noteworthy deductions include:
- Standard Deduction. This is a predetermined amount based on filing status that reduces taxable income. It's adjusted annually for inflation and is a straightforward way for many taxpayers to lower their tax burden.
- Charitable Contributions. If you decide to itemize deductions, contributions to qualified organizations, including donating clothes and other goods, can be deducted.
- Medical Expenses. If your medical expenses for the past tax year exceed a certain percentage of your adjusted gross income (AGI), out-of-pocket medical expenses can be deductible.
Avoid Common Errors
Mistakes on tax returns can delay your refunds, so it's crucial to:
- Report all income sources truthfully and accurately.
- Double-check the Social Security numbers and full names for yourself, your partner (if applicable), and all of your dependents.
- Ensure all eligible credits and deductions are claimed correctly.
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Plan for the Future
Some of the best ways to save on taxes and qualify for bigger refunds involve financial actions that you take over the course of the year, not just at tax time. So make some "new tax year's resolutions" and consider some key tax planning strategies:
- Use tax strategies for retirement like contributing as much as you comfortably can to any retirement accounts you have, such as IRAs or 401(k)s, which can reduce your taxable income. If you're approaching retirement, consider moving to a state or city that offers advantageous tax structures for retirees.
- Keep thorough records of deductible expenses throughout the year to simplify the filing process and ensure you're claiming all eligible deductions.
Use Free Tax Preparation Services
For low- to moderate-income individuals, the cost of tax preparation itself can be a burden. The IRS offers free tax help through its Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) programs. These services provide free tax advice and filing assistance, ensuring that taxpayers claim all the credits and deductions for which they are eligible.
Other organizations near you may offer similar community-based social programs and services. If you live in York County, Pennsylvania, for example, you can access VITA simply and for free through United Way.
Get FREE Tax Assistance with United Way of York County
United Way of York County in Pennsylvania is assisting hardworking households on their journey toward financial stability. In order to meet the needs of the ALICE population, we are embarking on an issue-focused strategy to create transformational impact for working households by focusing on two key barriers: childcare and transportation.
We offer many other resources through PA 211, a free, confidential health and human services information and referral hotline. Learn about how to use PA 211 to access resources such as housing assistance. Contact us today to get the services you need for a financially successful future!