Congratulations! You just got your first little bundle of joys in the hospital and you’ve made the long journey of parenthood. It is a trip full of joyful experiences that are well worth the annoyance involved, and it has many advantages – some of which are tax-related. Look forward to taking advantage of these child-related deductions and benefits.
- Income Tax Credit (EITC) – Designed to help lower income taxpayers who EITC is a tax credit that is graded according to income and the number of dependents claimed. See IRS Publication 596, “Income tax credit (EITC)“for details on qualifications and scaling criteria. The maximum EITC amount for the 2020 tax year is $ 6,660 for joint applicants with three or more qualifying children.
- Child Tax Credit and Child Additional Tax Credit – For the 2020 tax year, the Tax Cuts and Jobs Act (TCJA) increased the maximum child tax credit to $ 2,000 for each qualifying child. The TCJA also increased the Qualifying Modified Adjusted Gross Income (MAGI) to $ 400,000 for joint status, to $ 200,000 for singles, heads of household, or separate marriages. “The child tax allowance has been increased from $ 1,000 to $ 2,000,” said Eric Bronnenkant, Head of Tax at Betterment. “And that’s credits for every child you have under the age of 17. Let’s say you have three children under the age of 17 and you are below the income limit. Generally, you will receive a tax credit of $ 6,000. “
If your tax bill wasn’t large enough to receive the full tax credit, you may be able to claim the Child Supplementary Tax Credit, which is a refundable (d not owe tax) credit. cash IRS Publication 972 for more informations.
- Child and care loan – If you or your spouse have childcare costs so that you or your spouse can work (or find work), you can save up to 35% of yours Childcare costs. The maximum limit on expenses that can be claimed is $ 3,000 for one child / dependent or $ 6,000 for two or more. This results in an actual loan of $ 1,050 and $ 2,100, respectively.
- Education Credits – As your kids get older, you may be able to get either the American Opportunity Credit (AOC) or the Lifetime Learning Credit (LLC), which covers the cost of higher education – but you have to choose between the two. The AOC can reimburse up to $ 2,500 in tax credits that are up to 40% refundable while the LLC can give up to $ 2,000 in credits that are non-refundable. Details on qualifications and run-off limits are in IRS Publication 970, “Tax benefits for educationThe new tax law kept these two credits unchanged.
- Interest deduction for student loans – If you don’t qualify for the education loan, you may be able to deduct up to $ 2,500 in student loan interest. To apply for this deduction, your MAGI must be $ 170,000 or less if you are married together, or $ 85,000 or less for singles. Publication 970 also covers this deduction.
- Tax free 529 savings – The TCJA has expanded the use of funds in 529 savings plans. Before the new law, those funds could only be drawn tax-free from your 529 plan if they were used for qualified study expenses. Now you can use this fund to raise tax-free savings to pay private elementary and high school fees of up to $ 10,000 as well.
- Standard exemption – The TCJA has abolished the standard exemption for the 2018-2025 tax years. When exemptions are involved, any child you could claim as a dependent would reduce your taxable income by a certain amount of money. The exemption amounts would normally gradually be phased out above a certain Adjusted Gross Income (AGI).
Pay special attention to the Tax creditsbecause they are more valuable than prints. Tax credits are deducted directly from the taxes you owe, while deductions only reduce your taxable income, thus reducing your tax bill by the percentage of your tax rate. Affirms Bronnenkant: “Credits are generally more valuable than deductions because they lower your taxes one dollar at a time.” For example, a $ 1,000 deduction will cut your taxes by $ 100 if you are in the 10% tax bracket, while a $ 1,000 tax credit will cut your taxes by the full $ 1,000.
Who would have thought that your new addition to the family could bring you all of these tax breaks? Don’t forget about them during tax time – but in the meantime, just get used to your new lifestyle and take the time to enjoy your new bundle of joy. Before you know, he or she will ask for the car keys … and then your insurance goes up!
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