According to the Center on Budget and Policy Priorities, America is actually a tax-friendly country in which to live. Among developed nations, only Korea, Turkey, Chile and Mexico taxed their citizens less in 2007. In 2011, the IRS taxed middle-income families at the rate of only 5.6 percent on average. However, you usually can't lower your tax rate without taking advantage of all possible breaks offered by the IRS.
If you attend college even part time you may be able to lower your taxes by making use of tuition-related credits and deductions. The Lifetime Learning Credit lets you deduct 20 percent of your tuition and enrollment fees, up to $2,000 each tax year. If you're married and file a joint return, your modified adjusted gross income can't exceed $120,000 or you won't qualify. For most middle-income taxpayers, your MAGI is the same as your adjusted gross income, which appears on line 34 of your Form 1040. The American Opportunity Credit is similar. It's a tax credit of up to $2,500 for tuition, supplies and books, and only married taxpayers with MAGIs less than $160,000 can claim it. You have to choose one or the other; you can't take both.
You can deduct your tuition costs instead, but you can't do this and claim an education credit as well. The limit is $4,000 per tax year and, like the credits, the availability of this deduction disappears if you earn too much. If you're paying back student loans, the interest is deductible. You can deduct up to $2,500 each year, provided you and your spouse don't earn more than $120,000. You don't have to itemize to claim a tuition deduction. It comes off the first page of your Form 1040 to determine your AGI.
Health Insurance and Medical Costs
If you itemize deductions rather than take the standard deduction, you can claim your family's medical costs and health insurance premiums. This is usually only advantageous for middle-income and low-income families because the amount you can deduct is limited to what you paid in excess of 7.5 percent of your AGI. The more you earn, the higher your AGI and the higher the 7.5 percent threshold becomes. If you and your spouse earned $120,000, you could only deduct the portion of these expenses that exceed $9,000. If you earned $75,000, however, you could deduct anything over $5,625.
Saving for your retirement can also provide a tax break. With some limitations, you can deduct contributions you make to your IRA or 401(k), and you can also claim a tax credit for these contributions, called the saver's credit. The saver's credit is a percentage of what you contributed, and the percentage increases as your income decreases. If you're married, filing jointly and your AGI is $55,000, you can claim a credit of 10 percent of what you contributed, up to $2,000.
Child Care Credit
If your children go to a child care provider so you can work -- or even look for work or go to school -- this earns you a tax credit as well. Neither you nor your spouse can be available to care for your children yourself during these hours. The child care credit allows you to take back up to 35 percent of what you spent for work-related childcare, up to $3,000 in costs if you have one child or $6,000 if you have two or more children. Your children must be younger than 13, however, and this credit is also income-dependent. The more you earn, the less of a percentage of your costs you can claim.
- Center on Budget and Policy Priorities: Federal Income Taxes on Middle-Income Families Remain Near Historic Lows
- Bankrate.com: Financial Aid for Middle-Income Families
- Turbo Tax: Tax Exemptions and Deductions for Families
- GuideStone Financial Resources: Tax Credit for Low- and Middle-Income Taxpayers
- Legal Help for West Virginians: Rule 15 -- Modified AGI Limits (PDF)
- IRS: Topic 602 – Child and Dependent Care Credit
- Ryan McVay/Photodisc/Getty Images