Tax Breaks Parents Lose When Children Grow Up – So Take Advantage of Them Now

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Raising a child in todays world is not cheap by any means. Estimates for raising a child from birth through college in a middle class household range from $200,000 to $750,000. And costs are growing every year as education, health care and living expenses continue to rise. One mitigation or way to lessen the impact of these child related expenses is provided by the Federal government via a number of tax breaks.

Unfortunately a lot families with children or dependents are not taking advantage of these and basically giving up free money (especially the tax credits). Here are some of the more widely available tax breaks for children or dependents you need to review and take advantage of when filing your next tax return. Most automated tax software packages will help you figure qualification criteria and amounts.

Child Tax Credit

The $1.000 Child Tax Credit is a non-refundable tax break (ie can only be applied to taxes owed) available to families with children under the age of 17 (age 16 or younger). There are other relationship and income requirements to qualify for this credit but if you have young kids and are a middle income household you should qualify for some or all of this credit.

Additional Child Tax Credit

Even if your total credit exceeds the amount of your tax liability for the year and you don’t qualify for the child tax credit, you may still be eligible for the additional child tax credit. This credit is a refundable credit that you get it even if you don’t owe taxes. The Additional Child Tax Credit qualification is tied to the Child Tax Credit, but you need to complete IRS Form 8812 to determine if you are eligible (has a more complex calculation criteria). But generally speaking if you do not qualify for the Child Tax Credit, you likely won’t be able to take the Additional Child Tax Credit.

American opportunity tax credit

The American Opportunity Tax Credit (AOTC) – formerly the Hope Scholarship credit – offers up to $2,500 in tax credits for qualified higher education expenses. This is made up of 100% of the first $2,000 of qualified expenses, plus 25% of the next $2,000 of qualified expenses. In addition, interest deductions are available for interest paid on student loans for higher education. The AOTC is subject to income limits as follows:

  • Modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less for married filing jointly).
  • You receive a reduced amount of the credit if your MAGI is over $80,000 but less than $90,000 (over $160,000 but less than $180,000 for married filing jointly).
  • You cannot claim the credit if your MAGI is over $90,000 ($180,000 for joint filers).

There are also two other education tax breaks that parents can claim. One is the Lifetime Learning Credit (LLC) of $2,000. And the other is the tuition deduction of up to $4,000. Note however a deduction can only reduce your tax liability, whereas with a tax credit you get the money whether or not you owe taxes.

A taxpayer may claim the AOTC or another credit, the Lifetime Learning Credit (LLC), or a tuition deduction, but only one of these tax breaks on a tax return. The table below from the IRS summarizes the difference between the above:

CriteriaAOTCLLCTuition and Fees Deduction
Maximum credit or benefitUp to $2,500 credit per eligible studentUp to $2,000 credit per returnUp to $4,000 taxable income reduction per return
Refundable or nonrefundable40% of credit Not refundableDoes not apply
Limit on MAGI for married filing jointly $180,000$128,000 $160,000
Limit on MAGI for single or head of household$90,000$64,000$80,000
Dependent statusCannot claim credit if you are claimed as a dependent on someone else's return
Number of years of post-secondary education availableOnly if student hasn't completed 4 years of post secondary education before 2014All years of post secondary education and for courses to acquire or improve job skillsAll years of post secondary education 
Number of tax years credit available4 tax years per eligible student including any years former Hope credit claimedUnlimitedUnlimited 
Type of program requiredStudent must be pursuing a degree or other recognized education credential Student does not need to be pursuing a degree or other recognized education credentialStudent must be enrolled at eligible educational institution for one or more courses
Number of coursesStudent must be enrolled at least half time for at least one academic period in the yearAvailable for one or more courses Available for one or more courses at eligible educational institution 
Qualified expensesTuition, required enrollment fees and course materials needed for course of study Tuition and fees required for enrollment or attendance Tuition and fees required for enrollment or attendance
Whom can you claim the benefit for?You, Spouse, Dependent Student

Earned Income Tax Credit (EITC)

The EITC supplements the wages of low income workers and families, lifting more children out of poverty than any other single federal program. Over 9 million families are eligible for the EITC as shown in the table below for the latest tax year. You can see past and upcoming EITC tables here.

2016 Earned Income Tax Credit

Income Qualification ItemNo ChildrenWith 1 ChildWith 2 ChildrenWith 3+ Children
1. Maximum 2016 Earned Income Tax Credit Amount$506$3,373$5,572$6,269
2. Earned Income (lower limit) required to get maximum credit $6,610$9,920 $13,930 $13,930
3. Phaseout Threshold Amount Begins
(for Single, SS, or Head of Household)
$8,270$18,190 $18,190 $18,190
4. Phaseout Amount When Credit Ends
(for Single, SS, or Head of Household)
$14,880$39,296$44,648$47,955
5. Threshold Phaseout Amount Begins
(for Married Filing Jointly)
$13,820$23,740$23,740$23,740
6. Phaseout Amount When Credit Ends
(for Married Filing Jointly)
$20,430$44,846$50,198$53,505

How to read the table above. The maximum amount of the earned income credit allowed/payable is shown in line 1. To claim this credit you must have at least $1 of earned income, with line 2 showing the minimum amount of earned income required to get the maximum EI credit. The amount of credit you receive or qualify for varies based on income and number of children so will differ from person to person. The “threshold phaseout amount (lines 3 and 5 depending on filing status) and “completed phaseout amount” (lines 4 and 6 depending on filing status) are the adjusted gross income (AGI) ranges from where the EITC begins to phase out to where it reaches $0, or the income at or above which no credit is allowed.

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