4 Tax Credits That Can Save Parents Big Money
Parents have been through a lot this year—from trying to raise kids during a pandemic, to endless Zoom schooling, to high rates of job insecurity. In fact, a study by Catalyst found that 43% of parents in the U.S. reported that the coronavirus had a negative impact on their finances. But with the American Rescue Plan Act signed into law earlier this month, relief is on the way. The $1.9 trillion relief bill includes major changes in the Child Tax Credit, aimed at helping low to middle income families.
The best part about tax credits, or credits toward your overall tax owed, is that they are a dollar-for-dollar reduction. If your tax liability is $2,000 and you qualify for $2,000 in credits, your tax bill drops to zero. Credits are different from deductions though many people use the terms interchangeably. Deductions are dollar amounts subtracted from your adjusted gross, also called taxable, income. Deductions reduce the amount of income you are taxed on, while credits reduce the actual tax. (You can read more about deductions here!)
Here are the top tax credits that are available for parents and families that can make quite a difference in your overall tax liability.
Child Tax Credit
This year's Child Tax Credit (CTC) is a biggie, thanks to the $1.9 trillion American Rescue Plan signed into effect by President Biden earlier this month. Qualifying parents are now allowed a fully refundable credit of up to $3,000 for each child under 18, and $3,600 for any child under 6 years old. Not only is the credit amount higher than last year ($2,000 per child in 2020), families who qualify will receive half of the credit amount in advance payments. The IRS will begin the advance payments between July and December 2021. For example, if you have two kids and you get a credit mount of $6,000, half of that will be paid to you between July and December 2021, coming out to $500 per payment. Investopedia recommends including your account information on your 2020 tax return to receive the payments faster via direct deposit instead of a check in the mail. T0 take advantage of the 2021 Child Tax Credit, you and your children must meet the following criteria:
- Age: Child must be 17 years old or younger
- Relationship: Child (either biological or adopted), a step-child, or a foster child placed with you by a qualified agency, or any other family member who meets the age, dependency, citizenship, and residency requirements and has relied on you for more than half of their financial support for the tax year.
- Financial support: You must have provided at least half of the child's financial support over the course of the tax year.
- Dependent: You must claim the child as a dependent on your taxes.
- Citizenship: The child must be a U.S. citizen, national, or resident alien.
- Residence: The child must have lived with you for at least half the year.
- Family Income: You must have a modified adjusted gross income of less than $75,000 as a single filer or $150,000 if filing jointly with a spouse.
Although the AGI has decreased from last year ($200,000 single, $400,000 joint), high income families can still qualify for CTC. Zita Kwong of Bay Area-based KFK CPA tell Parents, "Even though the phase out amount has decreased, high income taxpayers can still claim the $2,000 per kid using the 2020 numbers." KFK CPA also recommends that if your income was significantly lower in 2020 than it was in 2019, then you should file early to increase your chance of getting the $1,400 stimulus check for each child and adult dependent in your family. "If parents know that their income in 2020 will be less than 2019, they should file their tax return early because their child may be qualified for the full amount of $1,400 stimulus payment," Kwong tells Parents.
Child and Dependent Care Credit
If you send your young child to daycare or after-school care, you know those prices are no joke. But, good news, the IRS says you might be eligible to get up to 35 percent of those costs back by claiming the Child and Dependent Care Credit. The credit maxes at $3,000 for one child or $6,000 for two or more. You can qualify for the credit if you (if filing single) and your spouse (if filing jointly) put your child in care to allow you to work, look for work, or attend school full time. You both must also have earned income for the year to qualify.
Earned Income Tax Credit
The Earned Income Tax Credit (EITC) is a tax credit that benefits low- and middle-income filers and those with children tend to get a higher credit than those without. "If you are below certain income thresholds (all of which are sub $60K for joint filers) you can qualify for the Earned Income Tax Credit," explains tax attorney Shann Chaudhry. "The EITC is for low income working people, to help offset costs. The EITC is refundable 100 percent. So if you received a credit in excess of what you owe, you might get a refund." To qualify you must earn less than $56,844 if filing jointly or less than $50,594 for single filers. The credit increases for each child but tops out at three kids. The most you can receive is $6,660 subtracted from your total tax bill. And, if the credit brings your liability down to zero but there's still money left over in the credit, it could push you over into refund territory!
American Opportunity Tax Credit
Parents of college students, this one's for you! The American Opportunity Tax Credit (AOTC) is for qualifying education expenses for the first four years of higher education. According to the IRS, to qualify for this credit the dependent student and parents must meet the following requirements:
- Be pursuing a degree or other recognized education credential
- Be enrolled at least half time for at least one academic period* beginning in the tax year
- Not have finished the first four years of higher education at the beginning of the tax year
- Not have claimed the AOTC or the former Hope credit for more than four tax years
- Not have a felony drug conviction at the end of the tax year
There are also income limitations to qualify: Filers' adjusted gross income cannot exceed $80,000 if filing single or $160,000 if filing jointly. There are also documentation requirements that the IRS looks at very closely, so be doubly sure you qualify for this one before filing. If you do, it can save you big bucks. You can get 100 percent of the first $2,000 of qualified education costs, and then 25 percent of any additional qualifying expenses. The maximum credit is $2,500 per year per student.