Top Tax Breaks For Families With Children Or Other Dependents
Top Tax Breaks For Families With Children Or Other Dependents
As any tax or financial professional will tell you, tax payers want to know that they are maximizing their tax breaks. No one wants to miss an obvious tax break and the tax code is so complex today, missing something is very easy to do. One of the most common mistakes is not properly claiming deductions relating to having children or other dependents.
Let’s start by defining who exactly is a dependent and then we will discuss what types of tax breaks you may be able to take if you have a dependent. Dependents include
A Qualifying Child:
- Has the same principal residence as you for more than half of the year,
- Is under 19 or under 24 and a full time student, AND
- Has received greater than 50% of total support.
A Qualifying Relative: You may also claim a relative such as a parent or any other member of your household including a child who does not otherwise meet the above child requirements if:
- Individual has gross income of less than $4,050 (2016), AND
- Had over half of their annual support contributed.
Below are the top tax breaks you may be missing if you have any dependents who could be listed on your tax return.
Every person who files a tax return in the U.S. qualifies for a personal exemption. If have dependents who do not file tax returns, you may be able to claim them on your tax return, generating a valuable tax break for yourself. I often joke with clients that the best way to reduce your taxes is to have a bunch of kids! Of course, we all know how expensive kids are, so you can decide for yourself if that strategy makes sense.
In 2016, and exemption is worth a $4,050 deduction against your total income. At a 25% Federal tax bracket, that could be worth $1,012.50 in tax savings. You are allowed to claim yourself as an exemption, but you are also allowed to claim others in your family, each racking up an additional $4,050 exemption. A married couple with two children, for example, will qualify for 4 exemptions. A married couple with 4 kids can take 6 exemptions. Take a look at the chart below for an idea of the tax savings available.
Number of dependents
Tax savings at 25%
Be careful though, if your income is too high, you could lose some of the benefit. If your adjusted gross income exceeds $311,300 for married filing jointly (2016) or $259,400 for single, the loss represents a 2% reduction for every $2,500 over these thresholds. For example, if you are married and your AGI is $350,000, and you are a family of 4 qualifying for $16,200 in exemption (4 x $4,050 each), your allowed exemption is reduced to $11,016 ($350,000 - $311,300 = $38,700 ÷ $2,500 = 15.48 which is rounded up to 16 x 2% = 32% reduction of your exemption).
Child Tax Credit
In addition to an exemption, if your dependent is a child under the age of 17, you may be able to qualify for a $1,000 per child tax credit. A credit is a dollar-for-dollar reduction of your actual tax liability, so can be a powerful way to reduce your taxes. The credit though, is phased out if your adjusted gross income is over $110,000 ($75,000 single). The phase out reduces the effective credit by $50 for every $1,000 of AGI over the limit. For example, if your AGI is $150,000, you make $40,000 more that the limit ($150,000 - $110,000), you would lose $2,000 in credit ($40,000 ÷ $1,000 = 40 x $50 = $2,000). If you have two children under 17, you qualify for $2,000 in credit which means in this case, you get no child tax credit ($2,000 - $2,000 in phase out). If you have 3 qualifying children under 17, you qualify for $3,000 in credit, in this case you would still be able to use $1,000 in credit ($3,000 - $2,000 in phase out).
Dependent Care Credit
The dependent care credit is also available if you pay someone to care for your child so that you can work. This could include day care, pre-school, after school care such as A+, but not first grade through twelve grade private tuition. Additionally, the credit is for those who are paying for care to allow them to work, so if you or your spouse is a stay and home parent, you most likely cannot claim the credit. The credit is 20% of expenses up to $3,000 for one child, or $6,000 for two or more children, if your adjusted gross income is over $43,000. If your income is less, you may qualify for a larger credit up to 35% of the cost.
The credit is available for expenses incurred for the care of a child under the age of 13 who is also a dependent, or any qualifying dependent of any age if they are physically or mentally incapable of caring for themselves.
Care providers can be anyone who is not your dependent, but you must list their name, address and taxpayer identification on your tax return to qualify.
If your children are older (over 17), you may still be able to benefit by helping them pay for college. Unfortunately, they are no tax credits or other tax savings for private elementary, middle or high school education. There are two main tax credits for postsecondary education tuition and fees. In both cases, expenses must be paid for yourself, spouse, or a dependent, but can include payments made with borrowed funds. The credit is claimed on the tax return that the child is listed as a dependent. This is an important distinction. For example, if your daughter is paying her own way through school, but you are still claiming her has your dependent, you would claim the tax credit on your tax return, not hers, even though you did not make the payments yourself.
The first credit is the American Opportunity Credit. It is available for students in their first four years of postsecondary education and they must be pursuing a degree, certificate, or other recognized educational credential. The credit is 100% of the first $2,000 of expenses and 25% of the next $2,000 for a maximum of $2,500. The credit phases out for adjusted gross incomes between $160,000 and $180,000 married or $80,000 to $90,000 single.
The second credit is the Lifetime Learning Credit and is available for any payments to an eligible educational institution that are part of a post-secondary degree program or part of a non-degree program taken to acquire or improve job skills. The credit is 20% of the first $10,000 of expenses up to a maximum of $2,000, even if there is more than one student on the tax return. Income phase-out is lower than the American Opportunity Credit, $110,000 to $130,000 for married, $55,000 to $65,000 single.
Obviously, the American Opportunity Credit is much more advantageous with a larger credit, allowance for unlimited number of students per tax return, and higher income phase outs. You can only take one of the credits per student, so if you use the American Opportunity Credit, you cannot use the Lifetime Learning Credit for that same student.