5 Tax Deductions Parents Often Miss
For some people, deductions, exemptions, and credits remain roughly the same over time. If you and your family have experienced major life changes over the past year, you may qualify for additional tax deductions to offset your liability. Parents, in particular, enjoy increased deductions for children of all ages.
Beyond the dependency exemption and child tax credit, here are five of the most frequently missed child-related tax deductions:
- Additional withholding allowance. If you have a new baby, ask your employer for a new W-4 form. You can now claim an additional allowance. New parents who claim their child as a dependent and file their child’s social security number in their upcoming tax return can legally claim one allowance for every child to lower paycheck withholdings. If you file jointly with a spouse and your spouse stopped working at the birth or adoption of your child, you may claim two allowances.
This form will also allow you to claim an allowance as the head of a household (primary earner or unmarried parent) and an allowance for the child tax credit. If you are concerned about how many allowances you should claim, consider talking to a tax professional or reading more about withholdings. Most families want to bring their tax liability as close to breaking even as possible. Too many withholdings will decrease your take home pay and too few will result in a bill during tax season. In 2017, parents in the 25 percent tax bracket can save an average of $85 per month for claiming a child as an allowance on their W-4s.
- Earned income credit. The earned income credit helps taxpayers in low to moderate income levels. Single earners without children must make $15,010 or less as a single earner and can only claim $510 in credit. For parents, the income level and maximum credit amount changes drastically. Single parents must make $39,617 or less to receive a maximum of $3,400 in credit for one child, and married parents filing jointly must make $45,207 or less to receive the same credit for one child. The savings and income cutoffs rise with each additional child and level off after three.
- Child care credit. Child care can cost parents more than in-state college tuition today. The child care credit can offset some of the costs of child care. If you pay a nanny, child care facility, early learning school, or other care center, you may qualify for the credit. This credit also works for spouses, children, and other dependents in the home who are physically/mentally incapable of self-care for more than six months.
With the credit, you may earn a maximum of $3,000 for one qualifying child younger than the age of 13 or other dependent. For two or more qualifying dependents, the credit amount maximum doubles to $6,000.
- Child-care reimbursement account. As an alternative to the child-care credit, some taxpayers look at opening child-care reimbursement accounts through their employers. These accounts are also referred to as a flex plan, and parents can place as much as $5,000 per year into the tax-advantaged account for paying child-care bills. The catch is that if you do not use all income diverted into the account, you will lose it at the end of the year.
You cannot use both the child-care credit and the child-care reimbursement account at the same time. To determine which tax planning strategy makes sense for your family, consider the maximum credit you would qualify for, your annual child care expenses, and the amount of taxes you would pay on income used for child care without a savings plan or credit. For families with two or more dependents, the $6,000 potential tax credit may make more sense. Some families find that the tax benefits of the reimbursement account outweigh any year-end losses sustained.
- American opportunity tax credit (AOTC). New dependents aren’t the only source of additional tax deductions. The IRS designed the American opportunity tax credit with college students in mind. The credit helps with your child’s first four years of post-secondary education. You may obtain a maximum credit of $2,500 per student. Even better is that if the credit brings your tax liability to zero, the IRS will refund 40 percent or up to $1,000 of remaining credit. Use Form 1098-T from your child’s school to determine the credit amount you may receive, and Form 8863 on your return to claim the credit.
The cost of raising one child to age 17 today is nearly $750,000, and many parents help their children through their college years. Use these tax benefits to lower your overall tax burden in 2017 and beyond. If you missed some big deductions, you may also want to look at prior year’s returns.
About the Author
Jayson Mullin is a tax expert at Top Tax Defenders, a tax resolution company that provides many services including removing IRS tax levies.