5 Tax Benefits of Having Kids
*Be sure to talk to your CPA or tax professional. This Blog post is for educational purposes only.
According to the USDA's current statistics, raising kids cost over a quarter of a million dollars during the first 18 years. Luckily, the IRS offers some tax breaks to help families with these huge expenses. According to records from the IRS, a family might get up to $4,879 in earned income tax credits (EITC) and child tax credits (CTC) alone in 2019. We know that being a parent whether you’re a couple or a single parent, is pure love and hard work just like the foundations and core of the Play Black Wall Street family. As a family we look forward and aim to give you financial resiliency and freedom the best way we can. This is what todays blog is about for all the parents out there who have children. Did you know that you can make tax work for you? Let's take a look!
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Make the Tax Code Work For You
Here are the 5 benefits of having children tax-wise and what you can do to make it work for you.
Based on the data from the IRS and the Tax Foundation A tax credit not only reduces the amount of money you owe in taxes, but some tax credits also result in a tax refund. If you are a parent or guardian looking for ways of reducing the cost of raising a child, here are five tax breaks you may be eligible for.
Child and Dependent Care Tax Credit
"Not to be confused with the child tax credit," Greene-Lewis says, "the child and dependent care credit can help you if you pay for child care." According to her, the credit is a dollar-for-dollar tax reduction 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. You could be eligible to claim the child and dependent care tax credit on your tax return if you pay for child care while working or looking for work. This credit provides a tax break for qualified expenses like summer camp or before or after school care. Your child must be under the age of 13 to be eligible (unless they are physically or mentally incapable of taking care of themselves). The child care and dependent care credit has now been improved for 2021, but now there is an income limit on who meets the criteria. A taxpayer earning up to $125,000 can deduct up to 50% of qualified expenses. The maximum amount of the credit is roughly $8,000 per child ($16,000 for two or more kids) for qualifying expenses. This is huge! If you are paying for childcare be sure to bring this up to your tax professional.
Your expenses that may qualify includes:
- Education costs: Payments made to a nursery, preschool, or other programs just under the kindergarten level.
- Before and after school care: Amounts paid to have your youngsters cared for before or after school.
- Summer camp expenses: Summer camp expenses paid for (however, overnight camp expenses do not qualify as the credit is meant to help parents during standard working hours.)
- Transportation costs: Amounts paid to a caregiver for transportation to and from the location of care.
- Care provided away from home: The cost of care provided away from home that is paid to a dependent care center or a qualified personal care provider.
Child Tax Credit (CTC)
Time to say goodbye to using your children as tax deductions and hello to using them as tax credits, which was one of the most significant changes brought about by the Tax Cuts and Jobs Act. "If you can prove your child as a dependent, you may be subject to tax credit, which is actually better than a tax deduction because it reduces your taxes dollar for dollar," explains Lisa Greene-Lewis, a certified public accountant, TurboTax spokesperson, and U.S. News contributor.
Qualifications to claim the CTC:
- Child must have a valid Social Security number,
- have lived with you at least half the year and is related to you.
- more than half of your child’s financial support must be provided by you. This can include lodging, food, utilities, repairs, clothing and education.
It's been extended to $3,600 for children under the age of 6 and $3,000 for those ages 6 to 17 in 2021. Additionally, the credit has already been made entirely refundable. If your modified adjusted gross income (MAGI) is up to $75,000 for single filers or $150,000 for married couples, you'll be eligible for the maximum CTC amount. If your income exceeds these limits, your credit will be lowered or you will be ineligible for any money at all.
The American Rescue Plan Act, act was signed by President Joseph Biden in March, which enables families for the first time in history to receive the child tax credit in monthly payments of up to $300 per kid under the age of 6 and up to $250 each child aged 6 to 17. Starting in July, families will have to sign up for automatic monthly payments through an IRS web portal. Game changer! Get support to pay for your kids all year but remember that means your tax bill may be higher than usual at the end of the year.
Download our Free 5 Tax Benefits of Having Children Guide
Earned Income Tax Credit
The EITC is a tax credit aims to assist low- and moderate-income taxpayers to decrease poverty and increase their participation in the workforce. The EITC is computed based on a percent % of your taxable income. Income from work includes things like salaries, tips, and net self-employment. Unemployment benefits, alimony, child support, and interest payments are not included in calculating the EITC because they are not considered earned income. While having a child isn't a requirement to claim the credit, parents who do have EITC-eligible children will receive a larger tax benefit. See. The Coronavirus Response and Relief Supplemental Appropriations Act of 2021, which was signed into law last Dec. 27, 2020. There's a unique lookback rule that lets people use their 2019 earnings as a way to assess their earned income tax credit and the refundable portion of the child tax credit in 2020, since their lower 2020 earnings could decrease the credits, they're entitled for, according to Greene-Lewis.
Your child qualifies for the credit if they have the following:
- Must have a valid Social Security number
- Is under the age of 19 (24 if enrolled in college full-time)
- Have a relationship with you. (Must be related to you)
- Lives or lived with you for at least half of the year in the United States
To be eligible for the EITC, your income must be at or above a certain threshold, depending on your filing status and the number of children you have. The maximum income for a married couple with three or more children is $56,844 ($57,414 in 2021). If you're a single taxpayer and your yearly income is less than $50,594 ($51,464 in 2021), you may be eligible.
Education Tax Credit
There is an American Opportunity Tax Credit (AOTC) for parents who've paid for their child's first four years of college in full. You can deduct tuition, fees, and course materials which you've already paid for.
You're allowed to claim up to a total of $2,500 for each child. That amounts to a 100 percent refund of your first $2,000 payment and a 25 percent discount on your second $2,000 payment. The AOTC is partially refundable up to $1,000, so taxpayers who qualify can get a refund of this amount even if they don't owe any taxes.
529 State Tax Plans
You can use a 529 state plan to save money for your children's future educational expenses. Each 529 plan is sponsored by a state agency, and all 50 states and the District of Columbia have at least one 529 plan each. Five-thirty-two (529) plans come in two forms: pre-paid tuition and education savings plan. Prepaid tuition plans allow you to pre-pay for future college or university attendance by purchasing credits now at a discounted rate. With an education savings plan, you can put money down for your child's future education, whether it's in college or technical school. Withholding on 529 plans is not tax-deductible, but there are other benefits to contributing to one. As an example of a tax advantage, most states provide a tax deduction for contributions made to a 529 plan. Plan ahead for your child's future and start a 529 account when you can. $5 a month for 10 years will add up quickly.
Taxes may sound nerve wrecking specially when you’re building a family but once handled correctly you just might be able to save more than you can imagine. Play Black Wall Street is here to provide you financial education and reminders but remember to get a tax professional.