Kids can be overwhelming when they are cooped up in the house during summer or winter break or while taking virtual classes at home, but they are also blessed tax-savers when you file your taxes.
Even though the dependency exemption was eliminated under tax reform, there are still some tax benefits you can take advantage of to maximize your tax refund if you have kids and other dependents.
While we’ll help you to understand the tax benefits of having dependents below, don’t worry about remembering these rules come tax time. For answers to this question and anything else related to your tax situation, TurboTax will ask you simple questions and give you the tax deductions and credits you’re eligible for based on your answers.
Additionally, if you still have questions, you can connect live via one-way video to a TurboTax Live tax expert with an average of 12 years of experience to get your tax questions answered. TurboTax Live tax experts are available in English and Spanish, year-round and can even review, sign and file your tax return, or even prepare your taxes from start to finish.
Child Tax Credit: You may be eligible for a tax credit, which is even better than a tax deduction because it reduces your taxes dollar-for-dollar. The Child Tax Credit is increased to a $2,000 credit under tax reform (it was previously $1,000 for 2017) and is available if you have a dependent child under the age of 17. The income threshold at which you can claim the Child Tax Credit is raised to $400,000 for couples who are married filing jointly and $200,000 if you are single.
Other Dependent Credit: If your dependent child is over 17 or you support a relative, you may still be able to claim the Other Dependent Credit of up to $500 per qualifying person. The credit begins to phase out if your adjusted gross income is greater than $200,000 (or $400,000 for married filing joint couples).
Child and Dependent Care Credit: Childcare is expensive, but Uncle Sam can help you out with the cost. If you are working or actively seeking work, and you pay childcare for your dependent who is under the age of 13 (no age limit if disabled), you can claim the Child and Dependent Care Credit.
This credit is a dollar-for-dollar reduction of your taxes, based on your childcare expenses, up to 35% of $3,000 ($1,050) for one child or $6,000 ($2,100) for two or more children. The credit ranges from 20% to 35% of your child-care expenses, depending on your income. Nursery school, private kindergarten, after-school programs, and daycare are all qualifying expenses.
Earned Income Tax Credit (EITC): There’s a special tax credit available if your wages or self-employment income are below a certain income level. The amount of credit you receive is based on your income, filing status, and how many qualifying kids you have.
The refundable tax credit you can receive ranges from a maximum of $6,660 if you have three or more children, to $538 if you have no children for tax year 2020. Unlike other tax credits, the Earned Income Tax Credit is refundable, so if the credit is greater than the tax you owe, you can still receive the difference as a tax refund.
If you earned less income as a result of the events that occurred in 2020, generally lower income can possibly decrease the amount of Earned Income Tax Credit and Additional Child Tax Credit you receive. However, under the Coronavirus Response and Relief Supplemental Appropriations Act, there is a special lookback provision that allows you to use your higher 2019 earned income to determine your 2020 Earned Income Tax Credit and the refundable portion of the Child Tax Credit, which may give you a higher Earned Income Tax Credit or Additional Child Tax Credit or both.
TurboTax will walk you through determining which income (2019 or 2020) will give you the best tax outcome.
The next time the kids are driving you crazy, remember these tax savings and give them a big hug instead.