If you ever wish you could get your kids to help out more around the house, at least they do their part when it comes to tax time. Which is fair. You give your kids shelter; the least they can do is act as a tax shelter.
In other words, play your cards right, and your kids may help you reduce your tax bill.
Not so long ago, the Tax Cuts and Jobs Act of 2017 brought a lot of changes to the tax code. So if you’re starting to look ahead to Tax Day, here are some of the bigger child-related tax credits you’ll want to keep in mind when you file your taxes:
- Child tax credit.
- Child and dependent care credit.
- Earned income tax credit.
- Recovery rebate credit.
- Adoption tax credit.
- Education tax credits and the tuition and fees deduction.
- 529 accounts.
Child Tax Credit
Say goodbye to using your children as tax deductions, but hello to using them as tax credits, one of the most significant transformations that came with the Tax Cuts and Jobs Act.
“If you’re able to claim your child as a dependent, you may be eligible for a tax credit, which is actually even better than a tax deduction because it reduces your taxes dollar for dollar,” says Lisa Greene-Lewis, a certified public accountant, spokesperson for TurboTax and U.S. News contributor.
“The child tax credit, which is available if you have a dependent child under the age of 17, was increased to a $2,000 credit under tax reform. It was previously $1,000,” Greene-Lewis says.
She says that you can claim the child tax credit if you’re a couple filing jointly and earn no more than $400,000. If you’re a single parent, you can be making up to $200,000.
Greene-Lewis also adds, “If your dependent child is over 17, you may still be able to claim the new other dependent credit of $500.”
To prevent crushing disappointment when you prepare your taxes, please keep in mind that you’re filing your taxes for the year 2020. That means that if you have a 17-year-old who turned 17 before Jan. 1, 2021, your teenager isn’t eligible for the $2,000 credit.
If your 17-year-old turned 17 on Jan. 1 or on any day in 2021, your teen is eligible for the $2,000 child tax credit.
Child and Dependent Care Credit
“Not to be confused with the child tax credit, the child and dependent care credit can assist you if you pay for child care,” Greene-Lewis says.
She says the credit is a dollar-for-dollar reduction of your taxes, based on your child care expenses, up to 35% of $3,000 ($1,050) for one child or $6,000 ($2,100) for two or more children.
“The credit ranges from 20% to 35% of your child care expenses, depending on your income, and expenses for things like nursery school, private kindergarten, after-school programs and day care all qualify,” she says.
Earned Income Tax Credit
If you have low to moderate income – for instance, $41,756 a year or less for a single parent with one child – you may qualify for the earned income tax credit.
“If you’re a parent, this huge credit can be worth up to $6,660 on your 2020 taxes if you have three or more kids,” Greene-Lewis says. “It’s worth noting that the earned income tax credit is also unlike other tax credits in that it is refundable, so you can still receive the difference as a tax refund if the credit is greater than the tax you owe.”
Greene-Lewis adds that there is an especially important provision to be aware of if your income dropped in 2020. She cites the Coronavirus Response and Relief Supplemental Appropriations Act of 2021, which was signed into law on Dec. 27, 2020.
“The provision allows a special lookback rule for individuals to use their earned income from 2019 to determine their earned income tax credit and the refundable portion of the child tax credit in 2020, since their lower 2020 income could reduce the amount of the credits they are eligible for,” Greene-Lewis says.
Recovery Rebate Credit
As everyone likely remembers, taxpayers received stimulus money in 2020 due to the pandemic.
“If you received the first or second stimulus payments for yourself or your spouse, but you did not receive the additional $500 for your qualifying child under 17 in your first stimulus check or the additional $600 for your qualifying child under 17 in your second stimulus check, you may be able to claim the additional stimulus amounts in the form of a recovery rebate credit when you file your 2020 taxes,” Greene-Lewis says.
Of course, when you’re preparing your taxes, don’t get your dates confused. Because that second stimulus happened around New Year’s, many taxpayers, if they got a second stimulus check, likely received it in 2021.
Adoption Tax Credit
According to the North American Council on Adoptable Children, for adoptions finalized in 2019, there is a federal adoption tax credit of up to $14,080 per child.
This can help offset the expenses of adopting a child, other than a stepchild, says Christina Taylor, operations lead at Credit Karma Tax.
“The adoption credit covers legal fees and any travel or meal fees you have as a result of the adoption process,” Taylor says. “If you’re adopting a special needs child, you can claim the entire adoption credit even if it exceeds your expenses. Keep in mind that this credit is limited to your tax liability.”
“If your child is in college, there are two credits you could potentially claim,” Taylor says, citing the American opportunity tax credit and the lifetime learning credit.
“The AOTC can be taken for four years, whereas the LLC has no time limit as long as your child is enrolled in qualifying higher education courses,” Taylor says.
The American opportunity tax credit covers 100% of eligible tuition and required fees up to $2,000 as well as another 25% of the next $2,000, translating into a total maximum credit of $2,500 per year. The lifetime learning tax credit offers a 20% credit on up to $10,000 in eligible expenses. You have to be making less than $59,000 as a single filer or less than $118,000 if you’re filing jointly, although there are reduced credits available up to $69,000 in income for singles and $138,000 for joint filers.
Taylor also notes that you may want to claim the tuition and fees deduction.
“This deduction can be claimed instead of an education credit, and may be more beneficial than the LLC for those who can’t claim the AOTC,” Taylor says.
A taxpayer in the lower- or middle-income range may save $2,000 to $4,000 annually.
Use Your Kids’ 529 Account for More Than Just College
Shann Chaudhry, an attorney in San Antonio whose firm focuses on business and tax law, says a big change in the new tax law is that funds from 529 plans can be used for things other than post-secondary education. “Up to $10,000 per year per beneficiary may be withdrawn from a 529 savings plan, income-tax free, if used for tuition expenses at private, public and religious K-12 schools,” he says.
“These plans are front loaded, as the growth is tax deferred, and typically at a lower rate than a student’s parents or grandparents,” Chaudhry adds. “Amounts can be withdrawn to pay principal or interest on a designated beneficiary’s or their sibling’s student loan. The amount of distributions for loan repayments of any individual is limited to $10,000 lifetime. Interest paid with these funds doesn’t qualify for the student loan interest deduction.”
You can also use any leftover 529 money to pay off old student debts, according to Chaudhry. It’s part of a recently passed Secure Act in Congress. The act is actually aimed at retirees but tucked away in it is a provision for younger adults.
“The Secure Act allows families to pay down student loan debt, up to $10,000,” Chaudhry says. “This is a one-time amount over the student’s lifetime.”
It also illustrates Congress’s dark sense of humor. After graduating college, who has anything left over in a 529 plan?