Dependent tax deduction: Tax exemptions and deductions for families

2023-05-01

Key Takeaways

• The Child Tax Credit can reduce your taxes by up to $2,000 (tax year 2022) per qualifying child age 16 or younger. If you do not owe taxes, up to $1,500 of the child tax credit may be refundable through the Additional Child Tax Credit for 2022.

• If you adopt a child, you may qualify for the Adoption Tax Credit, a nonrefundable tax credit that allows you to claim a credit of up to $14,890 for qualifying adoption expenses (tax year 2022).

• If you or your dependent is pursuing a degree at a school, you may qualify for the American Opportunity Tax Credit, a partially refundable tax credit of up to $2,500.

• If you paid interest on qualifying student loans during the tax year, you might be eligible to deduct up to $2,500 of that interest with the student loan interest deduction.

Family matters

As a family with children, you may have access to more tax deductions and credits than taxpayers without children. If you're not aware of these deductions and credits, you may be missing out on some tax savings.

If this is the first year you're filing your taxes, you may not be aware of some of the recent tax changes that have affected taxes and deductions for families. Here's what you need to know so you can file your taxes while claiming the deductions you're entitled to.

And if you don't want to go it alone, TurboTax can help by asking specific questions to make sure you get every deduction you qualify for.

The Tax Cuts and Jobs Act changed how families get deductions and exemptions

In December 2017, Congress passed the Tax Cuts and Jobs Act. It made significant changes regarding how some tax deductions and credits work for families. Most of these changes took effect in the 2018 tax year. Here are some of the key changes to be aware of and understand.

Removal of exemptions

The removal of personal exemptions is one of the largest changes. Before the 2018 tax year, you likely received a personal exemption for each qualifying member of your household. This may have included yourself, your spouse and any qualifying dependents.

In the 2017 tax year, the exemption typically resulted in a $4,050 reduction of taxable income for each one you qualified for. For a family that qualified for four exemptions, the total reduction of taxable income ended up being $16,200.

Starting in the tax year 2018, you could no longer claim personal exemptions. The removal of this popular reduction of taxable income may be partially or completely offset by the act's other changes, depending on your particular circumstances.

Standard deduction increase

While the new tax law removed personal exemptions, it also increased the typical standard deduction amounts.

In the tax year 2017, standard deduction amounts were:

Single: $6,350
Married filing separately: $6,350
Head of household: $9,350
Married filing jointly: $12,700
Qualifying widow(er): $12,700

For tax year 2022, the standard deduction amounts are:

Single: $12,950
Married filing separately: $12,950
Head of household: $19,400
Married filing jointly: $25,900
Qualifying widow(er): $25,900

For some families, these higher standard deductions offset the loss of exemptions. For others, these higher standard deductions didn't completely offset the loss of personal exemptions. In those cases, the next change may have helped recoup part of the loss of exemptions.

Child tax credit and credit for other dependents

The Child Tax Credit for Tax Year 2022

The Tax Cuts and Jobs Act increased the child tax credit for tax year 2022 from the old $1,000 limit. The new child tax credit results in up to a $2,000 credit per qualifying child age 16 or younger. If you owe no tax, up to $1,500 of the new child tax credit may be refundable using the Additional Child Tax Credit for 2022.

Children over age 16 aren't eligible for the child tax credit. However, these older children and other qualifying dependents may be eligible for a new tax credit of up to $500 called the credit for other dependents. Dependents must be a U.S. citizen, U.S. national or U.S. resident alien. They must also be a qualifying child or qualifying relative.

A qualifying child must meet the relationship, age, residency, support and joint return tests. A qualifying relative must meet the "not a qualifying child, member of household or relationship" test, gross income test and support tests. TurboTax asks questions to determine whether a person is a qualifying child or relative when you complete your tax return.

Both credits start phasing out, or being reduced, if your adjusted gross income exceeds $400,000 for married filing jointly filers or $200,000 for other filing statuses.

Stimulus impact on the Child Tax Credit for 2021

Child Tax Credit Changes

The American Rescue Plan raised the maximum Child Tax Credit in 2021 to $3,600 for qualifying children under the age of 6 and to $3,000 per child for qualifying children ages 6 through 17. In years other than 2021, the credit was worth up to $2,000 per eligible child, and 17 year-olds were not eligible for the credit.

The Child Tax Credit changes for 2021 have lower income limits than the original Child Tax Credit. Families that do not qualify for the credit using the revised income limits are still eligible for the $2,000 per-child credit using the original Child Tax Credit income and phase-out amounts.

In addition, the entire credit is fully refundable for 2021. This means that eligible families can get the entire credit, even if they owe no federal income tax.

New, Temporary Advance Child Tax Credit Payments

The Child Tax Credit for 2021 has been expanded by the American Rescue Plan Act. Part of this expansion is to advance the 2021 tax credit to families by sending them direct payments during 2021 rather than having them wait until they prepare their 2021 taxes in 2022.

The amount received is reconciled to the amount that you are eligible for when preparing your 2021 tax return. Most families received about one-half of their tax credit through the advance payments. If you received too little, an additional amount is credited on your tax return. In the unlikely event that you received too much, you might have to pay the excess back, depending on your income level.

For updates and more information, please visit our 2021 Child Tax Credit blog post.

TurboTax Tip: If you own a business, employing your child might enable you to take a business expense for the wages that you pay your child. The child's income usually is taxed at a relatively low rate when the wages stay under the $12,950 standard deduction (tax year 2022).

Adoption tax credit

If you have adopted or plan to adopt a child, you may be able to take advantage of the adoption tax credit. This nonrefundable tax credit allows you to claim a credit of up to $14,890 for qualifying adoption expenses for adoptions finalized in 2022.

The credit starts being reduced if your 2022 modified gross adjusted income exceeds $223,410 and completely phases out at $263,410. If you don't use the entire credit in the first year, you may be able to carry forward any remaining balance to future tax returns for up to five years.

Qualifying adoption expenses for eligible children include necessary and reasonable adoption fees, court costs, attorney fees, eligible travel expenses and other direct expenses in relation to adopting a child.

Eligible children must be under the age of 18 or be incapable of self-care due to physical or mental reasons. This credit does not apply to adopting a spouse's child.

Education-related deductions and tax credits

Education can be expensive. Tax deductions and credits may offset some of the costs.

American Opportunity Tax Credit

The American Opportunity Tax Credit is a partially refundable tax credit of up to $2,500. It can be claimed for qualifying education expenses for eligible students during the first four years of higher education. You get a 100% tax credit for the first $2,000 in eligible expenses. You also get a 25% tax credit for the next $2,000 of eligible expenses.

This credit is reduced if your 2022 modified adjusted gross income exceeds $80,000 for those filing single or $160,000 for those filing married filing jointly. There are other requirements to claim this credit. You can claim the credit for each qualifying student on a tax return.

Lifetime Learning Credit

The Lifetime Learning Credit is another option if you aren't eligible for the American Opportunity Tax Credit. You can't claim both this credit and the American Opportunity Tax Credit for the same student in the same year.

This credit is for up to $2,000 per tax year but starts phasing out when your 2022 modified adjusted gross income exceeds $80,000 for single filers and $160,000 for married filing jointly filers. The credit isn't refundable. It's calculated by taking 20% of up to the first $10,000 in qualified education expenses for qualifying students. You can only claim one Lifetime Learning Credit per tax return per year.

Tuition and fees deduction (2020 and earlier)

If you can't take the American Opportunity Tax Credit or Lifetime Learning Credit, you may qualify for the tuition and fees deduction. As a deduction, this reduces taxable income rather than directly reducing your tax the way a tax credit does.

You can deduct qualified education expenses as an adjustment to income on Form 8917. Up to a $4,000 deduction is available if your modified adjusted gross income is up to $65,000 for single filers or up to $130,000 for married filing jointly filers.

You can take up to a $2,000 deduction if your modified adjusted gross income is over $65,000 up to $80,000 for single filers or is over $130,000 up to $160,000 for married filing jointly filers. You can't take this deduction if your modified adjusted gross income exceeds $80,000 if you file single or $160,000 if you file married filing jointly.

This deduction is only for qualified education expenses incurred by eligible people including yourself, your spouse or a qualifying dependent. This deduction expired at the end of 2020.

Student loan interest deduction

You might be eligible for the student loan interest deduction if you paid interest on student loans during the tax year. This deduction can be up to $2,500 for qualifying student loan interest paid.

The deduction starts phasing out at a 2022 modified adjusted gross income of $70,000 for single filers and $145,000 for married filing jointly filers. If your modified adjusted gross income exceeds $85,000 for single filers or $175,000 for married filing jointly filers, the deduction isn't allowed at all.

Itemized deduction opportunities and changes

Itemized deductions could help your family claim more money in deductions than the standard deduction offers. The medical expense itemized deduction may be especially useful for families with many qualifying medical expenses. Qualifying medical and dental expenses that exceed 7.5% of your adjusted gross income can be claimed as an itemized deduction.

Suppose your family had high medical and dental expenses due to you, your spouse or a qualifying dependent's accidental injury or medical treatment. In that case, this could help you claim extra deductions if you already itemize deductions. Unfortunately, if you don't have enough itemized deductions to exceed the standard deduction, you won't benefit from the medical and dental expenses deduction.

Before the 2018 tax year, itemized deductions could be limited if your income exceeded certain limits. That limitation was removed by the Tax Cuts and Jobs Act.

2021 Stimulus checks and the related tax credit

In March of 2021, the IRS began sending out a third round of Economic Impact Payments to help ease the financial burden of the coronavirus pandemic. The payments are an advance of a tax credit on your 2021 tax returns that are typically filed in 2022.

The stimulus check calculations were typically based on 2020 tax return data. Your 2021 tax year numbers may vary from these amounts and if you qualify for a larger credit than you received in your stimulus check, you may be able to claim the difference on your 2021 tax return. If it turns out that you're eligible for less based on your 2021 tax return, you don't have to pay back the difference.

Additionally, your situation may have changed resulting in being eligible for a larger tax credit than the stimulus checks received. For instance, you may qualify for a larger credit if you have a child born in late 2021 and you did not receive a credit for the child. Thankfully, you may be able to still claim whatever credit you're owed on your 2021 tax return, less any stimulus check amounts you received.

The stimulus check amount starts decreasing as your adjusted gross income goes over the following limits based on your filing status:

Single: $75,000
Head of household: $112,500
Married filing jointly: $150,000

2020 Consolidated Appropriations Act

The Consolidated Appropriations Act (CAA) was signed into law on December 27, 2020 as a stimulus measure to provide relief to those affected by the pandemic. For tax year 2020, the CAA allows taxpayers to use their 2019 earned income if it was higher than their 2020 earned income in calculating the Additional Child Tax Credit (ACTC) as well as the Earned Income Tax Credit (EITC). For 2021, taxpayers can use either their 2019 or 2021 earned income amounts depending upon which one provides the higher credit.

Annual increases due to inflation adjustments

Each year, the IRS makes annual inflation adjustments to certain items. These can help reduce your taxes owed compared to a scenario where the IRS didn't make inflation adjustments.

For instance, the IRS increased the standard deduction amounts from 2021 to 2022. The married filing jointly and qualifying widow(er) standard deduction increased by $800. The standard deduction for married filing separately and single taxpayers increased by $400. For those filing as a head of household, the standard deduction increased by $600.

While tax rates generally remain the same, the tax brackets increase slightly each year due to inflation. The particular tax brackets differ depending on your filing status.

Other ideas to save on your taxes

Families have other ways they may be able to save on their taxes. For instance, business owners could employ their children within their businesses. If you do, you may be able to take a business expense for the wages that you pay your child. Your child's income may also receive a relatively low overall tax burden as long as the wages stay under the $12,950 standard deduction for 2022.

If your children are in college, you may want to consider purchasing a second home in their college town. This may allow you to take advantage of the mortgage interest and real estate tax deductions for second homes on your tax return. You would have to itemize to take these deductions, and they may not provide much benefit depending on your situation. Make sure to run the numbers before doing so.

Family life can be hectic. Don't let your taxes add to your stress level. TurboTax can help you efficiently file your tax returns and ensure you claim all of the credits and deductions your family qualifies for so you can get every dollar you deserve.

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