The Internal Revenue Service (IRS) offers many deductions and credits that benefit parents and other taxpayers who claim dependents.
To take advantage of these tax breaks, here are seven tax filing tips you need to know.
You must have correct Social Security Numbers (SSN) for all dependents.
In years past, you could get by without having a SSN for very young children. However, that is no longer the case.
Now, if a dependent doesn’t have a SSN or other tax identification number, you can’t take a deduction or claim other tax benefit for them – no exceptions.
In fact, if you try, you could be fined.
Double–check the SSN is correct on your return and that the name matches exactly what is printed on your child or dependent’s Social Security card.
Don’t pass on the Earned Income Tax Credit (EITC).
The EITC is one of the most generous tax benefits out there, but it’s also one of the easiest to miss. The income thresholds for this credit are not as high as you may think.
If you had one child and are filing a joint return for tax year 2016, you and your spouse can collectively earn up to $44,846 and still claim credits.
With two children, you may qualify for a credit if you and your spouse collectively earn up to $50,198 and file a joint return. If you have three or more children, the income limit is $53,505.
EITC benefits vary dramatically depending on the number of dependents you have, so you’ll want to make sure to claim each one.
A common way people miss out on this benefit is by assuming only the parent who claims the dependency exemption can take the EITC for the qualifying child.
However, the parent who has the child living with him or her is the only one that can claim the child for this credit. It’s entirely possible that one parent claims the child as a dependent, and the custodial parent claims the child for the EITC.
Get your full credit from child care expenses.
If you pay someone to take care of your child while you work or look for work and your income is below $15,000, you may qualify for a credit of up to 35 percent of the first $3,000 in expenses. If you have two or more children, the credit may be as much as 35 percent of up to $6,000 in expenses.
The percentage falls by 1 percent for every additional $2,000 of income until it reaches 20 percent ($43,000 or more).
To take this credit, you need the Social Security number or other tax identification number of the person or organization to whom you pay the expenses.
That’s a good reason not to pay child care providers “under the table.” You should insist they give you receipts and provide you with the information you need to get your tax benefits.
If you cannot get this information from the provider, be prepared to show that you used due diligence trying to get it.
You are eligible for this credit until your child reaches age 13. However, if your child or other dependent is not physically or mentally capable of self-care while you work or look for work, you can take this credit regardless of the child’s age.
Take employer reimbursements for child care if available.
As valuable as the Child and Dependent Care Credit is, employer reimbursements for child care may be even better. If you have access to a reimbursement account at work, you or your employer may be able to contribute up to $5,000 a year into this account and use it for child care.
Because the money you put into this account escapes both Social Security and income tax, it is especially valuable to taxpayers who have mid-to higher income levels.
You may also hear this type of plan being referred to as a dependent care benefit plan.
Don’t assume you can’t take a dependency exemption.
Every individual you can claim as a dependent lowers your taxable income by $4,000 for tax year 2016. That will save you about $1,000 if you’re in the 25 percent tax bracket.
Watch out for these examples of situations in which it’s easy to miss a dependency exemption:
- A child is born during the year. It doesn’t matter when your child was born during the year. If he or she shows up before New Year’s Day, you take the exemption for the whole year.
- A child or dependent passes away during the year. You may be able to claim a dependent for the year your child died if your home was considered the child’s permanent home for more than half of the time he or she was alive. You cannot claim an exemption for a stillborn child, however.
- You support a child who doesn’t live with you. If your child or dependent did not live with you because he or she was temporarily away at school or hospitalized, for example, he or she may still qualify for the exemption. A child may also be your dependent even if he or she lives with the other parent as long as you meet the qualifications to take the dependency exemption.
- Your “child” isn’t so little anymore. You can still take a dependency exemption for your dependents after age 18 if they are going to school full time and are under age 24. According to the IRS, “full time” means they met the school’s full-time attendance qualifications for five months during the year. The months do not need to be consecutive.
Being a parent may qualify you for a different filing status
Choosing the right filing status can make a big difference in your tax bill. If you’re single and have a child or other dependent, you may be able to use the Head of Household filing status.
This may be true even if the child’s other parent claims the dependency exemption.
Generally, filing as Head of Household will lower your tax rate and raise your standard deduction when compared to filing as single or married filing separately.
Additionally, if your spouse has passed away and you have a qualifying child, you may be able to file as Qualifying Widow(er) With Dependent Child for two years following the death of your spouse.
Education expenses can score you a tax credit.
Be sure to tally up the education expenses you had this past year, including books and supplies, to see if you qualify for the American Opportunity Tax Credit.
You may be eligible for as much as $2,500 to cover those costs, and that’s not just based on tuition expenses. You can also claim the cost of related fees, books, supplies and equipment for yourself, your spouse and any dependents.
However, the credit you can claim is reduced at higher income levels.
Another popular education credit is the Lifetime Learning Credit, which can save you up to $2,000 in tax.
Your maximum Lifetime Learning Credit is also reduced as your modified adjusted gross income rises, however, there is no limit to the number of years you can claim it.