Kids can be overwhelming when they are cooped up in the house during summer or winter break or while taking virtual classes at home, but they are also blessed tax-savers when you file your taxes.

Even though the dependency exemption was eliminated under tax reform, there are still some tax benefits you can take advantage of to maximize your tax refund if you have kids and other dependents.

While we’ll help you to understand the tax benefits of having dependents below, don’t worry about remembering these rules come tax time. TurboTax will ask you simple questions about you and give you the tax deductions and credits you’re eligible for based on your answers. 

Additionally, if you still have questions, you can connect live via one-way video to a TurboTax Live tax expert with an average 12 years experience to get your tax questions answered. TurboTax Live tax experts are available in English and Spanish, year round and can even review, sign and file your tax return, or you can fully hand your taxes over–all from the comfort of your home.

Child Tax Credit: You may be eligible for the Child Tax Credit, which is a tax credit that you get for your dependent kids, that’s even better than a tax deduction because it reduces your taxes dollar-for-dollar. Starting in tax year 2021 (the taxes you file in 2022), the Child Tax Credit under the American Rescue Plan increased from $2,000 to up to $3,000 per qualifying child over the age of six and up to $3,600 for each qualifying child under six. Under the new provision, this is the first time that families with children age 17 will be eligible for this credit. You will be eligible for the full credit if your income is under $150,000 for couples who are married filing jointly and $75,000 if you are single or $112,500 as head of household.  

Families who are not eligible for the expanded $3,000 or $3,600 credit because they earn higher than the modified adjusted gross income mentioned above may still be able to claim the Child Tax Credit up to $2,000 under the existing tax provision for each qualifying child under 17. This credit amount is still available to individuals earning up to $200,000 or married couples filing jointly earning up to $400,000. 

Eligible families may receive an advance payment of their 2021 Child Tax Credit of up to $300 per month for each child under age 6 and up to $250 per month for each child age 6 and above. Instead of getting this credit as part of your refund in 2022, these payments may be sent in advance and represent a portion of the tax year 2021 Child Tax Credit. 

Other Dependent Credit: If you don’t qualify for the Child Tax Credit and your dependent child is over 17 or you support a friend or a relative, you may still be able to claim the Other Dependent Credit of up to $500 per qualifying person. The credit begins to phase out if your adjusted gross income is greater than $200,000 (or $400,000 for married filing joint couples). 

Child and Dependent Care Credit: Childcare is expensive, but Uncle Sam can help you out with the cost. If you are working or actively seeking work, and you pay childcare for your dependent who is under the age of 13 (no age limit if disabled), you can claim the Child and Dependent Care Credit. Nursery school, private kindergarten, after-school programs, daycare and even summer and winter day camps are all qualifying expenses.

This credit is a dollar-for-dollar reduction of your taxes, based on your childcare expenses. The American Rescue Plan made some major changes to the Child and Dependent Care Credit for tax year 2021 only.

  • The expense limit increased from $3,000 for one qualifying individual to $8,000 and from $6,000 for more than one qualifying individual to $16,000.
  • The percentage used to calculate the credit increased from up to 35% to 50% of expenses so the maximum credit is up to $8,000 ($16,000 x 50%).
  • Income phase outs have increased, but there is an income where the credit is completely phased out. Prior to the American Rescue Plan the credit was reduced at incomes over $15,000. For tax year 2021 only, the credit is reduced at adjusted gross income of more than $125,000 and it is completely phased out at adjusted gross income of $438,000.
  • For tax year 2021, the credit is fully refundable, meaning you can get the credit even if you don’t owe any taxes.

Earned Income Tax Credit (EITC): There’s a special tax credit available if your wages or self-employment income are below a certain income level. The amount of credit you receive is based on your income, filing status, and how many qualifying kids you have.

The refundable tax credit you can receive ranges from a maximum of $6,728 if you have three or more children, to $1,502 if you have no children for tax year 2021. Unlike some other tax credits, the Earned Income Tax Credit is refundable, so if the credit is greater than the tax you owe, you can still receive the difference as a tax refund.

If you earned less income as a result of the events that occurred in 2021, generally lower income can possibly decrease the amount of Earned Income Tax Credit you receive. However, there is a special lookback provision that allows you to use your higher 2019 earned income to determine your 2021 Earned Income Tax Credit, which may give you a higher Earned Income Tax Credit. 

TurboTax will walk you through determining which income (2019 or 2021) will give you the best tax outcome. 

So, next time the kids are driving you crazy, remember these tax savings and give them a big hug instead.

Source link

Leave a Reply

Your email address will not be published.