When you start working on your tax planning strategies for the past year, you’ll inevitably see the word “dependent” come up.The term may seem a little vague at first, but a dependent is simply someone who depended on you for their care and income last year. Our children are often the people who come to mind when we think of dependents, but they’re by no means the only people you can claim as dependents.
In fact, there are two distinct categories of dependents: qualifying children and qualifying relatives.
Qualifying children can be your son, daughter, stepchild, adopted child, foster child, brother, sister, half-brother, half-sister, stepsister or stepbrother, grandchild, niece or nephew. However, there are more age and residency criteria that qualifying children must meet, which you can read about here.
Qualifying relatives, on the other hand, don’t have to be children. They can even be your boyfriend or girlfriend in certain cases where your significant other is unemployed or in school. You can use this test from the IRS to help determine if you have a qualifying relative you can claim as a dependent when filing your taxes.
And if you can, that’s great! Because there are several tax benefits to having dependents in your family when you file. Here are four of the most important benefits of claiming dependents while tax planning:
If you have a dependent child under the age of 17, then you can use the Child Tax Credit. The tax credit is $3,000 dollars, and the income threshold for receiving it is $75,000 filing single, or $150,000 if you’re married filing jointly. And because this is a credit, not a deduction, it reduces your taxes directly, rather than reducing your taxable income. Even better, if the CTC reduces your taxes to $0, the remaining part of the tax credit can be refunded to you through the Additional Child Tax Credit (ACTC).
This credit is worth $500 and can be claimed for a dependent child over 17, parents, or a qualifying relative supported by the taxpayer. Dependents must have individual taxpayer identification numbers. Unfortunately, the ODC is nonrefundable, meaning that if it reduces your taxes to $0, you won’t be refunded the remaining amount of the credit.
This tax credit is for those taxpayers who have dependents and whose income falls below a certain threshold. The amount of this credit depends on the taxpayer’s income, how many children they have, and their filing status. The maximum credit for any filing status is $6,728 for three or more children. The minimum credit is $543 for 0 children. As the CTC, the EITC is refundable. So, if it reduces your taxes to $0, you’ll be refunded the leftover amount of the credit.
This credit is a non-refundable credit available to parents who are both working or actively looking for work. If you have a dependent who is 13 or younger, and you pay for childcare for that dependent, you can use the CDCC. If your dependent is physically or mentally unable to care for themselves and lived with you for more than half of the year, the age limit does not apply. In addition, you can also claim this credit for a spouse who is physically or mentally unable to take care of themselves.
The maximum credit is $3,000 for one qualifying dependent and $6,000 for two or more qualifying dependents.
- Deductions don’t operate the same way as credits. Instead of reducing your taxes dollar-for-dollar, they reduce your taxable income. Remember, these only apply if you are itemizing your deductions rather than taking the standard deduction. Most people end up taking the standard deduction, but if you are itemizing as part of your tax planning strategies, don’t forget about:
Student Loan Interest
- If you paid student loan interest for a dependent or a spouse or you are a student yourself, you can deduct the interest amount of upto $ 2,500 on a loan for higher education. This interest deduction can be claimed as an adjustment to income on your Form 1040
Medical and Dental Expenses
- If the combination of you and your dependents’ medical and dental expenses is greater than 7.5% of your adjusted gross income, then you can deduct the amount exceeding the 7.5% threshold.
As you can see, the government has created numerous credits and exemptions to help those who are caring for dependents throughout the year. Dependents can reduce your tax burden significantly, even landing you a refund in some situations. So don’t forget about them when it’s time to start your tax planning this year. Otherwise, you may miss out on some important tax credits and deductions.
Worried about missing something important in your taxes this year? Contact AG FinTax today and let us handle it for you.