Tax Credits for High Income Families/Earners (Tax Series Part 1)

Tax Credits for High Income Families/Earners

What is a tax credit? A tax credit is basically free money from the government. If your income is low enough, sometimes you can come out ahead with tax credits and get more money out than you put in. That doesn’t really happen in our situation as high-income earners. I am starting a series where I will try to outline the major parts of the U.S. tax code and dissect it into bite size pieces.

Obviously, everyone’s situation is different but knowing the code will help you maximize income and have more money available for things like retirement planning and funding education.

Since the basic premise of this site is that the people who come here have an adjusted gross income of $100,000 or more, I would like to frame these tax situations to those individuals.

Credits and deductions that would not pertain to high-income earners (HIE) will be glossed over because they won’t help us anyway, but I will try to mention them just so you know they exist.

TaxAct

 

I have used a red header for the tax credits that are less likely to pertain to HIE. There is a green header for those that have higher income limits or no limits. There is one with a yellow header for caution. This way you can quickly scan the document for the tax credits that might be of interest to you.

tax credits for high income earners

Earned Income Credit

These are the maximum Earned Income Tax Credits Incomes before you do not qualify so that eliminates most of us.                                    

Filling StatusZero ChildrenOne ChildTwo ChildrenThree or More Children
HoH, Single, Surviving Spouse$15,010$39,617$45007$48340
Married Filing Jointly$20,600$45,207 $50,597 $53,930

The main provision I could see where a high-income earner would still be eligible for the EITC is when all the pay is from a Combat Zone or other non-taxable military pay that does not have to be reported for EITC purposes.

 

Child and Dependent Care Credit

 This is a credit for childcare so that you, the parent, can work or look for work. The credit is between 20-35% of a fixed amount. The amount is $3000 for one child or $6000 for two or more children.

As high-income earners we are going to be at the 20% level, so you are looking at $600-$1200 maximum. Your AGI must be below $43,000 to get any more than the 20% credit.

 

Lifetime Learning Credit

 This is a credit for educational expenses of 20% of the first 10,000 in qualified expenses. There is no limit to the number of years you can claim this credit. The income limits are 56,000 ($112,000 for joint filers) and they phase out between $66,000 and $132,000.

 

American Opportunity Tax Credit

The amount of the credit is 100 percent of the first $2,000 of qualified education expenses you paid for each eligible student and 25 percent of the next $2,000 of qualified education expenses you paid for that student.

So as high-income earners we can get $2500 per year per dependent as long as the student is enrolled in at least one academic period beginning in the tax year. You also cannot have filled for the AOTC or former Hope credit four times or more and no felony drug convictions.

To claim the full credit, your MAGI (modified adjusted gross income) must be $80,000 or less ($160,000 or less for married filing jointly). You cannot claim the credit if your MAGI is over $90,000 ($180,000 for joint filers). There is a phase out between those two levels.

Adoption Credit

 The maximum amount for 2017 is $13,570 per child.

For both the credit and the exclusion, qualified adoption expenses, defined in section 23(d)(1) of the Code, include:

  • Reasonable and necessary adoption fees,
  • Court costs and attorney fees,
  • Traveling expenses (including amounts spent for meals and lodging while away from home), and
  • Other expenses that are directly related to and for the principal purpose of the legal adoption of an eligible child.

The 2017 Adoption Tax Credit begins to phase out for taxpayers with modified adjusted gross income (MAGI) more than $203,540 and completely phased out for taxpayers with MAGI of $243,540 or more.

 

Child Income Tax Credit

This is a credit that taxpayers receive just for the fact of having a child dependent. There are seven qualifying tests to consider: age, relationship, support, dependent status, citizenship, the length of residency and family income. Most High income earners probably won’t see this credit but only if your income is below these levels:

  • 2017 maximum income limits are 110,000 (joint return), $75,000 (individual) and $55,000 (Married, filing separate) for the $1000 credit. You can get $1000 per child.

        

Credit for the Elderly or the Disabled  

 AGI (Adjusted Gross Income) has to be below $25,000 for married or $17,500 for single. The credit is between $3,750 and $7,500, but not applicable to High Income Earners.

 

Health Insurance Premium Credit

 This is another one that probably won’t pertain to most high-income earners. If you buy your health insurance off the marketplace that was established by the ACA in 2014, you may be eligible if the MAGI for everyone in your household added together is between 100% and 400% of the poverty level. For a family of four that is $97,200. Here is the table with 2017 poverty levels.

 

Number of People 100% of Poverty Level 400% of Poverty Level
1 11,800 47,550
2 16,020 64100
3 20,160 84650
4 24,300 97,200
5 28,440 113,800
6 32,580 130,300
7 36,730 146,900
8 40,890 163,550

Add 4,160 for each additional person over 8 per household.

You can calculate your potential credit here.

Just as an example, I did a calculation for a family of 5 making $113,700 a year (just below the 400% cutoff) and I received a discount on my premium of $68 a month. Just remember that if you miscalculate your income on the low side, you could have to pay this back if you elect to have reduced premiums instead of the credit when filing your taxes that year.

 

Health Coverage Tax Credit

Probably won’t apply to anyone reading this but here are the qualifications:

You may be eligible to elect the HCTC only if you are one of the following:

  • An eligible trade adjustment assistance recipient, alternative TAA recipient or reemployment TAA recipient,
  • An eligible Pension Benefit Guaranty Corporation payee, or
  • The family member of an eligible TAA, ATAA, or RTAA recipient or PBGC payee who is deceased or who finalized a divorce with you

 

Mortgage Interest Credit

 This is a crazy one. All requirements for this credit are controlled by the individual state agency that issues the certificate. You have to get a “Mortgage Credit Certificate” and then you can get this credit. It seems every state has different criteria to qualify. I would wager anyone making a high-income won’t qualify. In Texas, the program is only eligible for “A Targeted Area”. This is a census tract in which 70% or more of the families have incomes that are 80% or less of the statewide median income or an area of chronic economic distress. It is probably not worth looking into. If you can get it, this credit is worth a maximum of 40% of the interest you pay for the year.

 

Energy Credits

  1. Nonbusiness Energy Property Credit
  • You may be able to take a credit equal to the sum of:
  • 10% of the amount paid or incurred for qualified energy efficiency improvements installed during 2016
  •  any residential energy property costs paid or incurred in 2016. Although unpublished at the time of this article, I expect 2017 rules to be the same. Make sure before spending anything on energy products if the credit is important to you. 

But there is a catch:

  • A combined credit limit of $200 for windows for all tax years after 2005.
  • A total combined credit limit of $500 for all tax years after 2005.
  • A credit limit for residential energy property costs for 2016 of $50 for any advanced main air circulating fan; $150 for any qualified natural gas, propane, or oil furnace or hot water boiler; and $300 for any item of energy-efficient building property.
  1. Residential Energy Efficient Property Credit

You may be able to take a credit of 30% of your costs of qualified solar electric property, solar water heating property, small wind energy property, geothermal heat pump property, and fuel cell property. Include any labor costs properly allocable to the onsite preparation, assembly, or original installation of the residential energy efficient property and for piping or wiring to interconnect such property to the home. (IRS.gov)

The credit amount for costs paid for qualified fuel cell property is limited to $500 for each one-half kilowatt of capacity of the property.

 

Low-Income Housing Credit

This credit is for owners of low-income housing in special designated areas where low-income families live. If you aren’t the owner of low-income housing don’t worry about this one. The specifics are too involved to go into here, but if you do own low-income housing,  you should contact your local Department of Housing and Community Development (DHCD) for this credit. 

 

Earned Income Tax Credit

The maximum amount of credit for Tax Year 2017 is:

  • $6,318 with three or more qualifying children
  • $5,616 with two qualifying children
  • $3,400 with one qualifying child
  • $510 with no qualifying children

Qualifying Children Claimed

If Filing...Zero ChildrenOneTwo Three or more
Single, Head of Household or Widowed$15,010$39,617$45,007$48,340
Married Filing Jointly$20,600$45,207$50,597$53,930

 

 

Retirement Savings Contributions Credit

(Saver’s Credit)

2017 Saver’s Credit
Credit Rate Married Filing Jointly Head of Household All Other Filers*
50% of your contribution AGI not more than $37,000 AGI not more than $27,750 AGI not more than $18,500
20% of your contribution $37,001 – $40,000 $27,751 – $30,000 $18,501 – $20,000
10% of your contribution $40,001 – $62,000 $30,001 – $46,500 $20,001 – $31,000
0% of your contribution more than $62,000 more than $46,500 more than $31,000

Maximum credit is $2000 single, $4000 jointly

 

Foreign Tax Credit

If you paid or accrued foreign taxes to a foreign country or U.S. possession and are subject to U.S. tax on the same income, you may be able to take either a credit or an itemized deduction for those taxes. This credit comes into play for HIE when we invest in foreign stocks funds. Also, the mutual fund/index fund chooses to pass the foreign taxes paid credit onto the shareholders. Check out IRS Form 1116 for more details.

 

Excess Social Security & RRTA Tax Withheld

This would come into play for HIE if you worked for two employers during the year and had more than the maximum allowed Social Security Tax withheld.

 

Credit for Tax on Undistributed Capital Gain

You are allowed a credit for the tax if a mutual fund or real estate investment trust (REIT) paid a tax on your capital gain distribution.

 

Nonrefundable Credit for Prior Year Minimum Tax

The Alternative Minimum Tax (AMT) attempts to ensure that individuals and corporations that benefit from certain exclusions, deductions or credits pay at least a minimum amount of tax. If you are not liable for AMT this year, but you paid AMT in one or more previous years, you may be eligible to take a minimum tax credit against your regular tax this year. (irs.gov)

The minimum tax credit is allowed only for the AMT caused by deferral items, such as depreciation. You may also increase your minimum tax credit to the extent you had a qualified electric vehicle. This is a way to recoup some taxes paid last year if you hit the AMT cap on deductions. We will discuss this in other articles.

 

Credit to Holders of Tax Credit Bonds

This credit probably doesn’t pertain to many people but even if you are a HIE you can qualify, so I included it. The requirements are that the holder receives a tax credit in lieu of some or all of the interest on the bond. You may be able to take a credit if you are a holder of clean renewable energy bonds (issued before 2010). New clean renewable energy bonds, qualified energy conservation bonds, qualified school construction bonds, qualified zone academy bonds or Build America Bonds are also eligible.

 

Wrap Up

 These are all the tax credits available for individuals. If you have any other questions please consult IRS.gov.  I hope this summary is helpful and gets you off on the right foot when tackling your tax forms or consulting a tax professional to help you with your taxes.  Remember that I am not a tax expert or an accountant so please confirm everything I have written before acting on the information.  Check out the tax deductions for high-income families in the next two parts of the series. 

Start tracking your expenses, deposits, and investments with Personal Capital. It’s a great way to keep track of all your accounts in one easy platform. I use it to track my investment returns and overall net worth. Just click the link to the right and start your account today. The best part is it’s all free. There is nothing else on the market today that is as powerful and easy to use. 

Tom
Tom is a doctor and father of five with a passion for parenting and finance. When he isn't skateboarding, riding BMX, or jumping on the trampoline with his kids, he is reading and writing about personal finance. He helps high income parents educate and mentor their kids to become financially, emotionally, and intellectually self sufficient.

8 Responses to “Tax Credits for High Income Families/Earners (Tax Series Part 1)

  • Super Max
    2 months ago

    Thanks for this. This will be a great reference later on when I start doing my taxes.

  • Strong work, Tom. So many tax credits become phased out when you start making doctor money, and it’s awfully difficult to keep track of it all. Well, it was, anyway. Not anymore — thanks for the all-encompassing summary.

    This information should come in handy in a couple years when I ditch the high-income salary!

    Best,
    -PoF

    • I hope it helps. I always worry I’m missing something when I sit down to do the taxes. Hopefully these summaries will help us all save a little on the amount we transfer to Uncle Sam.

      • I’ve had the same CPA for nearly ten years, and I don’t worry much about him missing things – he’s married to a physician.

        I do think it is helpful for those of us planning on an early retirement. The American Opportunity Tax Credit will be huge for us, and we wouldn’t get any of that money if I remained gainfully employed when my boys are in college.

        Best,
        -PoF

  • I had the Excess Social Security taken out this year (2 employers) and it made for a nice refund at the end of the year! While it sucked to pay taxes twice, when the refund check came it went straight into my IRA.

    Thanks for putting these together. I took a health care tax credit in 2015 when we underwent IVF. If you spend more than 10% of your AGI then you can deduct a portion of the amount over the 10% on your taxes. It sucked spending near $40K on IVF but the tax deduction was nice.

    • Sorry Triple D, for some reason you went to spam. I just caught it. You should be good to go for future comments.

      I know this isn’t the most exciting post, but a decent portion of my site will be research that nobody else wants to do. Hopefully it can be a resource for those who need it someday. Thanks for dropping by.

  • I think as high income earners, you must lower your adjusted gross income as much as possible. Max out your 457, 401k, and any other pre tax plans available. if you have access to a health savings account, max out those contributions.

    I have read, if you are in a Physician practice, you can also create a defined contribution pension plan in order to further reduce your taxable income. I think that’s a good idea as well, if you happen to be self employed.

    As Physician on Fire has pointed out on his blog, if you are high income, you have to worry about getting slammed with dividend and cap gain taxes as well. He bought Berkshire Hathaway class B, to work around this punishment. Berkshire doesn’t ever plan to pay a dividend, and when he’s retired, he can sell in a much lower tax bracket. That’s a great strategy.

    I would like to talk about the child tax credit and the phase outs, for a married couple, since you have five kids.

    110 AGI, phase out for first child begins, completely phased out at 130k
    130k- phase out for second child begins
    150k- 3rd child phase out
    170k- 4th child phase out
    190k- 5th child phase out.

    Above illustrates why I think it’s so imperative to get your adjusted gross income down. Also, the first $2500 in student loan interest is tax deductible each year. Not sure about phase outs, but that’s another way to reduce your AGI. You might also get your itemized deductions hit by Pease phase outs at higher income levels. https://taxfoundation.org/pease-limitation-itemized-deductions-really-surtax/

    By reducing your adjusted gross income, you should be able to “recapture” some of these itemized deductions.

    Hope this helps. Cheers.

    • Awesome FP! That should be a blog post in itself.

      I’m a big proponent of reducing AGI. I just wrote a reply over on the Bogleheads forum about trying to reduce my AGI as the best tax strategy for high income earners.

      I’m pretty much hosed when it comes to tax credits with my current income, but I guess that is a good problem to have.

      We are currently looking into a defined contribution plan in my group and the tax savings are substantial. The problem I see is that the funds aren’t available until I leave the company or age 62 and the rate of return is intentionally low. Currently I don’t have much in my bond allocation, but if I approached the DCP like my bond allocation, it would make sense.

      The other strategy I employ is maximizing my tax loss harvesting ability. Being able to deduct that $3000 a year right off earned income by selling poor investment is a savings of $1200 a year for those in the top bracket. That adds up.

      Thanks for stopping by. Have a great week.

Comment Below

Your email address will not be published. Required fields are marked *