Top 9 Tax Benefits Of Parenthood

Other Taxes, Tax Returns, Taxes


Congratulations! You have just been handed your first little bundle of joy in the hospital and have embarked on the long journey of parenthood. It is a trip full of joyful experiences that make the corresponding aggravations worthwhile, and it comes with many benefits — some of which are tax-related. You can look forward to taking advantage of these child-related deductions and benefits.

  • Standard Exemption – Every child that you can claim as a dependent decreases your taxable income. For the 2017 tax year, that amount is $4,050. The exemptions begin to phase out at an adjusted gross income (AGI) of $261,500 for single filers and $313,800 for married filing jointly. The Tax Cuts and Jobs Act of 2017 (TCJA) has eliminated the standard exemption going forward, so this tax season is the last time you will be able to claim it.
  • Earned Income Credit (EITC) – Designed to help lower income taxpayers, the EITC is a tax credit that is scaled along with income and the number of dependents claimed. See IRS Publication 596, “Earned Income Tax Credit (EITC)” for details on qualifications and the scaling criteria. The maximum EITC amount for tax year 2017 is $6,318 for joint filers with three or more qualifying children, and that number will rise to $6,444 in 2018 (next year’s return).
  • Child Tax Credit and Additional Child Tax Credit – For tax year 2017, each qualifying child can allow you to take a tax credit of up to $1,000 if your modified adjusted gross income (MAGI) is less than $110,000 for married filing jointly status, $75,000 if single or head of household, and $55,000 if married filing separately. If your tax bill was not large enough to take the full tax credit, you may be able to take the Additional Child Tax Credit, which is a refundable credit (meaning that it is a credit you can claim and receive as a refund even if you do not owe any taxes). Check out IRS Publication 972 for more information.

    Under the TCJA, the Child Tax Credit will double to $2,000 per qualifying child from tax year 2018 onwards, and the refundable credit increase to $1,400. Furthermore, the income thresholds are increasing from $75,000 to $200,000 for single filers and from $110,000 to $400,000 for married couples filing jointly.

  • Child and Dependent Care Credit – If you incur child care costs in order for you or your spouse to be able to work (or to look for work), you may be able to claim up to 35% of your child care expenses. The limit on the expenses that can be claimed is $3,000 for one child/dependent or $6,000 for two or more. That results in $1,050 and $2,100 in actual credit respectively.
  • Education Credits – As your children get older, you may be able to take advantage of either the American Opportunity Credit (AOC) or the Lifetime Learning Credit (LLC) that applies to the costs of higher education — but you must choose between the two. The AOC can yield up to $2,500 in tax credits that are refundable up to 40%, while the LLC can provide up to $2,000 in credit but is not refundable. Details on qualifications and phase-out limits are available in IRS Publication 970, “Tax Benefits for Education”. The new tax law kept both these credits in place without change.
  • Student Loan Interest Deduction – If you do not meet the qualifications for the education credits, you may be able to deduct up to $2,500 in student loan interest. To claim this deduction, your MAGI must be $160,000 or less if married filing jointly, or $80,000 or less for single filers. Publication 970 also covers this deduction. Note that the former Tuition and Fees Deduction has already expired.
  • Tax-Free 529 Savings – The TCJA has expanded the use of funds in 529 savings plans. Before the new law, these funds could be drawn from your 529 plan tax-free only if used for qualified college expenses. Now you may use this fund to accumulate tax-free savings to pay for private elementary and high school fees, too. While this doesn’t apply to the 2017 tax return you’ll file this April, it is worth keeping in mind while planning for your child’s education.

Take special care to investigate the tax credits, because they are more valuable than deductions. Tax credits are subtracted directly from the taxes that you owe, while deductions only reduce your taxable income, and therefore reduce your tax bill by the percentage of your tax rate. For example, a $1,000 deduction lowers your taxes by $250 if you are in the 25% tax bracket, while a $1,000 tax credit lowers your taxes by the full $1,000.

Who knew that your new addition to the family could bring you all these tax benefits? Don’t forget about them come tax time — but in the meantime, simply get used to your new lifestyle and take the time to enjoy your new bundle of joy. Before you know it, he or she will be asking for the car keys… and then your insurance will go up!

Get your Refund Fast and File your Taxes for Free.

Photo ©iStockphoto.com/Todor Tsvetkov



Source link

Products You May Like

Leave a Reply

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