If you want to pay as little in tax as possible, you have to know about the top tax breaks available to you. Fortunately, there are many ways you can reduce your taxes, and millions of Americans take advantage of favorable tax laws to pay less to Uncle Sam when they file their returns. In particular, the three key provisions you'll find below help the average American save thousands on their tax bills.
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Data source: IRS.
1. Earned income tax credit
The earned income tax credit offers savings to workers with incomes up to certain limits that vary depending on family size. For those filing their 2016 tax returns, the income limits for single filers range up to nearly $48,000, while married filers with incomes up to $53,500 can sometimes claim the credit. Maximum credits vary from more than $500 for those without children to more than $6,250 for those with three or more children. On average, according to the latest preliminary data from the IRS, those who claim the credit get an average of $2,415 back from the federal government.
One key aspect of the earned income tax credit is that it's a refundable credit. That means you can get a refund even if you wouldn't otherwise have any tax liability, making the earned income tax credit somewhat unusual in its generosity. However, because the credit is somewhat complicated, an estimated one in five taxpayers who are eligible fails to claim it by filing a tax return, leaving free money on the table.
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2. Child tax credit
The child tax credit is unusual because of its simplicity. The tax provision offers a credit of up to $1,000 for each qualifying child. Children must be 16 or younger at the end of the tax year and must be related to you. Each qualifying child must be eligible for you to claim as a dependent, and you must provide at least half the financial support for the child. Finally, the child must live with you for more than half the year.
The regular child tax credit is not refundable, but the laws creating it also set up what's called the additional child tax credit, which is refundable. Further requirements for the additional tax credit apply, including a minimum of $3,000 of earned income, and income limits can restrict some taxpayers from taking the full credit or any credit at all. But when you add up the savings from both credits, the typical American saves $2,432 in taxes as a result of child-related credits.
3. Deduction for taxes paid to state and local governments
Finally, the IRS lets you take state and local taxes paid as an itemized deduction. That's not as valuable as a credit, but the unlimited nature of the deduction creates some big amounts. On average, the 43.4 million people who took itemized deductions for state and local taxes claimed $11,699 per return. Depending on the tax bracket, that would have created savings of between $1,170 and $4,632 on your final tax bill.
The range of state and local taxes is fairly wide. Real estate taxes to state, county, and city government entities are among the most commonly taken, but you can also choose between deducting state income taxes and sales taxes. You can't take both sales taxes and income taxes, but even with that limitation, the deduction is among the most popular in the tax code.
These tax breaks can save many taxpayers a lot of money at tax time. Be sure to look closely and see if you qualify for savings using these provisions. If you do, then you'll be glad you went to the effort to find out more about them.
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