Today is Tax Day, April 18, 2017.
So as you prepare to file and head off to the tax man last minute, here are 10 tax rules and credits parents and caregivers need to know about and should consider claiming this year.
1. Exemptions for dependents
You can claim your new baby as a dependent, which, for 2016, exempts $4,000 of your hard-earned money from taxation. For 2016, this number actually goes up to $4,050. This exemption is phased out at certain income levels. For 2015 taxes, the limit is $258,250 for single parents and $309,000 for married couples filing jointly. For 2016, the limits are $259,400 and $311,300, respectively. Similarly, you can’t claim an exemption if you’re subject to the Alternative Minimum Tax.
2. Child Tax Credit
Depending on your income, you may be able to claim a $1,000 tax credit every year until your child reaches age 17. Better yet, you can start claiming the credit the year your child is born, even if that doesn’t happen until December. In other words, if you had a baby on Dec. 31, 2016, you can still snag that $1,000 for 2016. Sweet!
Remember, unlike with deductions, credits lower your tax bill dollar for dollar. However, similar to exemptions for dependents, the child tax credit phases out at higher income levels, though you cannot even claim it until you’ve earned more than $75,000 if you’re single or $110,000 if you’re married and filing jointly. The credit has the ability to reduce your tax liability to zero, but it is not refundable, meaning, it cannot count towards a refund from the IRS! Booo!!
3. Earned Income Tax Credit
Don’t worry those of you in the low to moderate income bracket, the Earned Income Tax Credit makes you eligible for up to 3,373. However, the Earned Income Tax Credit (EITC) is a tax benefit for those with with only one qualifying child. And the EITC is a fully refundable credit, which means that if it’s more than large enough to reduce your tax liability to zero, then you’ll receive any remaining credit money as a refund from the IRS.
4. Education expenses
In most cases, you can’t deduct the full amount of your child’s educational expenses because they are considered to be personal expenses. However, the following credits may help ease your tax burden:
- Deduction for college tuition expenses. This deduction is available to you regardless of whether you itemize your deductions. The maximum deduction is $4,000. The maximum deduction drops to $2,000 and then disappears completely as income rises. Expenses eligible for the deduction are higher education tuition and mandatory enrollment fees. These same expenses are also eligible for the American Opportunity tax credit but you can’t take both in the same year.
- American Opportunity and Lifetime Learning Credits. The American Opportunity Credit is a tax credit of up to $2,500 for all four years of a college education. Single taxpayers with modified adjusted gross income (MAGI) of $80,000 or less and married taxpayers with MAGI of $160,000 or less are eligible. If the American Opportunity credit is not available, the Lifetime Learning credit might be allowed. It applies to tuition and mandatory enrollment fees for just about any post-secondary course. It is 20 percent of the first $10,000 of eligible expenses to a maximum of $2,000. MAGI limits are $60,000 for single taxpayers and $120,000 for married taxpayers filing jointly. For more information on higher education tax breaks, see IRS Publication 970: Tax Benefits for Education.
- Education Savings Accounts: Education Savings Accounts (ESAs) allow up to $2,000 each year to be contributed for each child under age 18. You can save a fairly sizable amount over several years. ESA contributions aren’t tax-deductible, but you can withdraw your investment and earnings tax-free as long as you use the funds to pay for college costs. If your child chooses not to attend college, you can transfer the balance to another member of the family. You can use the money from an ESA to pay for elementary and high school education, as well as for college educational costs. The ability to make ESA contributions is phased out for higher-income taxpayers.
- Student loan interest:Interest on student loans you take out to pay for college or vocational school expenses can also be deductible. The student loan interest deduction limit is $2,500 for qualified student loans, but the deduction is phased out for higher-income taxpayers. For 2016, the phase out begins at $120,000 on joint returns and at $60,000 for unmarried individuals.
5. Adoption credit
If you adopted a kid last year, you can claim up $13,570 per child for qualified adoption expenses. This credit phases out, depending on the income at $203,540 which is a higher income phase out level compared to the income level for the child tax and child care credits. Though this credit was once refundable, that’s no longer the case . However, any credit in excess of your tax liability can be carried forward for up to five years.
Of course, keeping track of all these tax breaks could prove challenging when you’re juggling the dozens of daily tasks that come with raising children. But when you sit down to do your taxes this year, it pays to see whether you’re eligible for any of them, because any amount of money can go a long way toward diapers, school supplies, and the ever-growing list of supplies you’ll need to navigate the wild and crazy journey that is parenthood.
6. 2017 EITC and ACTC Related Tax Refund Delays: The IRS has already announced that it will have to hold/delay refund payments for people claiming the Earned Income Tax Credit (EITC) or Additional Child Tax Credit (ACTC) due to additional anti-fraud safeguards/reviews under newly enacted laws (PATH Act). While the IRS will continue to accept returns claiming EITC and ACTC the new law requires the IRS to hold refunds on tax returns claiming these popular credits, even if you have claimed it successfully in past years, until Feb. 15th 2017. Refund payments will subsequently be delayed past the current schedule up to the week of Feb 27th, 2017 or later (assuming all other items are in order). Also note that the IRS is required to hold the entire refund — even the portion not associated with the EITC and ACTC. Note however that this refund hold only applies to the Additional Child tax credit. Not the standard Child tax credit.
The threshold for the other child related tax credit, known as the kiddie tax – meaning the amount of unearned net income that a child can take home without paying any federal income tax was is $1,050. For 2017, the net unearned income for a child under the age of 19 (or a full-time student under the age of 24) that is not subject to “kiddie tax” is $2,100.
To clarify which child qualifies, From SavingToInvest.com
7. Child Tax Credit Qualification rules
The Child Tax Credit (CTC) covers children under 17 years-old and is available to tax paying parents or legal guardians on the child. Full CTC eligibility is subject to income limits as shown in the table above. The IRS has published additional information around claiming this credit via one or qualifying children. A Qualifying child for this credit is someone who meets the following criteria of six tests: age, relationship, support, dependent, citizenship, and residence:
- Age Test – To qualify, a child must have been under age of 17 (i.e. 16 years old or younger) at the end of the year in which the credit is being claimed for.
- Relationship Test – To claim a child for purposes of the Child Tax Credit, they must either be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister or a descendant of any of these individuals, which includes your grandchild, niece or nephew. An adopted child is always treated as your own child.
- Support Test – In order to claim a child for this credit, the child must not have provided more than half of their financial support in the given financial year the credit is being claimed for.
- Dependent Test – You must claim the child as a dependent on your federal tax return. No one else can claim the child.
- Citizenship Test – To meet the citizenship test, the child must be a U.S. citizen, U.S. national, or U.S. resident alien.
- Residence Test – The child must have lived with you for more than half of the year you are the claiming the credit for.
- Income Limitations – The credit is limited if your modified adjusted gross income is above a certain amount. Limits are shown in the table above based on filing status. The credit is reduced/phased-out by $50 for each $1,000 of income above the income threshold amounts. The phaseout ranges are set by statute and so are not adjusted for inflation.
- In addition, the Child Tax Credit is generally limited by the amount of the income tax you owe as well as any alternative minimum tax (AMT) you owe.
- Additional Child Tax Credit (ACTC) – If the amount of your Child Tax Credit is greater than the amount of income tax you owe, you may be able to claim the Additional Child Tax Credit (ACTC). The ACTC is equal to the lesser of the un-allowed Child Tax Credit, or 15% of your earned income that is more than $3,000.
More from TurboTax:
8. Medical expenses
You can deduct any expense you pay for the prevention, diagnosis or medical treatment of physical or mental illness, and any amounts you pay to treat or modify any part or function of the body for health—but not for cosmetic purposes. (So you can deduct the cost of LASIK eye surgery to correct your vision, but not the BOTOX® Cosmetic injections to smooth the wrinkles around your eyes.) You can also deduct the cost of transportation to the locations where you can receive this kind of medical care, your health insurance premiums, and your costs for prescription drugs and insulin.
Medical expenses are only deductible if you itemize, and only if they exceed 10 percent of your Adjusted Gross Income. You can only deduct the medical and dental expenses that exceed those percentages.
There is a temporary exemption from Jan. 1, 2013 to Dec. 31, 2016 for individuals age 65 and older and their spouses. If you or your spouse are 65 years or older or turned 65 during the tax year you are allowed to deduct unreimbursed medical care expenses that exceed 7.5% of your adjusted gross income. The threshold remains at 7.5% of AGI for those taxpayers until Dec. 31, 2016.
Example: Emma’s Adjusted Gross Income was $100,000, and she spent $8,000 on medical expenses. She and her spouse were both under age 65 in 2016. Because her expenses did not exceed 10 percent of her AGI, she cannot take the deduction for the amount above $7,500. Her deduction is $0.
Qualified long-term care expenses are treated as medical expenses subject to the 10 percent of AGI floor. Medical expenses also include the premiums you pay for qualified long-term care insurance. However, the amount of premium you can deduct is limited based on your age. For 2016, deductible premium amounts range from $390 to $4,870, depending on the covered person’s age at year end.
There is an exception for qualifying health insurance premiums paid by eligible self-employed individuals. Such costs can be deducted as adjustments to income which means eligible taxpayers can deduct 100 percent of their qualifying health insurance premiums on page 1 of Form 1040. (In other words, this write-off is available whether you itemize or not.)
Deducting medical expenses for someone else
You can deduct medical costs you pay directly to medical service providers for another person according to the following rules:
- If you pay medical expenses for someone you do not claim as a dependent on your income tax return, you can deduct those expenses if:
- He or she either lived with you for the entire year as a member of your household.
- He or she is related to you (as described in the section Who’s a Relative).
- He or she was a U.S. citizen or legal resident, or was a resident of Canada or Mexico, for some part of the year.
- You provided over half of his or her support for the year.
Note that these rules are slightly less stringent than those for the dependency exemption. For example, it’s possible that you can deduct medical expenses you paid for a parent in 2016, even though you can’t claim the parent as a dependent because his or her gross income exceeded $4,050.
- If you paid a person’s medical bill this year for an expense incurred last year, and that person was your dependent last year, you can deduct the expenses on this year’s return even if he or she isn’t your dependent this year. The key factor is that the person was your dependent when the medical services were provided.
- If you’re divorced and pay medical expenses for your child, but don’t claim him or her as a dependent because you are the non-custodial parent, you can still deduct those expenses. This assumes that you would qualify to take a dependency exemption for your child is you were the custodial parent.
- You can deduct medical expenses that you pay for your spouse. What most people don’t know is that you can claim medical expenses for your spouse’s medical treatments that occurred before you were married if you paid those bills after your marriage. The rule is that you must be married either at the time of the medical treatments, or at the time the bills are paid.
For a complete list of qualified medical expenses, see IRS Publication 502: Medical and Dental Expenses.
9. Child and Dependent Care Credit
Lower income people who earn less than $15,000 can qualify for the full 35%. That percentage falls by 1% for every additional $2,000 of income you earn until it reaches 20% for an income of $43,000 or more. You must have earned income to qualify for the credit, and if you’re married, you must file a joint tax return. Additionally, you must have paid a child care provider for the purpose of enabling you and your spouse to either work or look for work.
Unlike some other credits, this one doesn’t have an income limit, however families with Stay-At-Home moms who have a nanny caring for the kids can NOT take this credit. It is also refundable.
10. Other ideas to consider
- If you are the sole proprietor of your own business, consider employing your child (under the age of 18) for certain tasks. You can pay your child up to $6,300 in wages (the maximum standard deduction for the single person in 2016) without incurring income taxes and most employment taxes. The wages would be tax-free to your young employee and you could deduct the wages as a business expense on your own tax return.
- If you have a child going to college in another area, consider purchasing a house or a condominium for your child to live in. By treating the house or condo as a second home, you can deduct the mortgage interest and real estate taxes on your own tax return.