As you prepare to file your taxes, please keep in mind some helpful tax deductions and credits that may apply to your family.
What’s Better – A Tax Credit or Deduction?
First off, many families filing are a bit confused over what exactly tax deduction and credits are. While they can both help you with your tax obligation, there are differences.
Tax deductions lower your income that is eligible to be taxed. This helps you as it may lower your tax bracket. Tax credits, on the other hand, actually reduce your taxes owed, dollar for dollar.
There are two types of credits: non-refundable and refundable. A non-refundable tax credit will decrease your income tax owed and possibly eliminate it. You do not get a refund from it if your credit is more than your income tax owed. With the refundable tax credit, as the name implies, not only can you reduce or eliminate your income taxes, if it totals more than you owe, you can get a tax refund for the difference.
Tax Deductions for Families
If you’re looking at reducing how much of your income is taxed, here are some tax deductions you may want to check out to see if you qualify for them.
- Exemptions for Dependents: If you have dependent, such as a child, then you can claim an exemption worth $4,050 in 2016($4,000 in 2015). You must have a social security number for your dependent.
- IRA Deductions: If you’ve contributed to your traditional IRA, you may receive a deduction for your contribution, up to $5,500 ($6,500 if 50 and over).
- Charitable contributions: Many of us keep receipts for charitable donations, but did you also include the supplies you purchased to help a non-profit organization?
- Personal property taxes: You may have received a state and local tax bill during the year for your personal property like a recreational vehicle. While it’s a chunk of change out of your budget, the good news is that state and local property taxes related to personal property may be tax deductible.
Tax Credit for Families
While there are many tax credits available, the most common that help families are Earned Income Credit, Child Tax Credit, and Child and Dependent Care Credit. I’ll briefly discuss the benefits of each, so you can get an idea of whether they apply to your family’s situation or not.
- Earned Income Credit: Depending on your income and your family size, you may be able to take advantage of this big tax credit. For example, for 2016 taxes, the maximum credit for a family with 3 or more qualifying children is $6,269.
- Child Tax Credit: For parents meeting the income requirements ( currently for couples whose MAGI is under $110,000 or $75,000 for a single parent), this credit can be worth $1,000 for each qualifying child under 17 you claim on your taxes.
- Child and Dependent Care Credit: If you paid for child care for your dependents (under 13) while you worked or went to school, you may be able to take this credit based on your child care expenses up to 35% of $3,000 for one child or $6,000 for two or more children.
- Adoption Credit: Those households who expanded family through adoption can use the adoption credit worth up to $13,460.
Thoughts on Tax Deductions and Credits for Your Family
By taking all of the tax deductions and credits that you’re family is eligible for, you can minimize your tax liabilty and perhaps increase your tax refund. I’d love to hear from you about which tax credits and deductions your family have used.