Raising a family has countless benefits, but did you know some of those benefits come in the form of reducing the amount you pay in taxes?
No matter how comfortable you feel about your family’s net worth, minimizing your tax liability as much as possible is always wise. And making the most of the tax relief available for having children is one way you can do that.
Here are eight ways families can save money this tax season, from tax credits to tax-saving strategies.
1. Child Tax Credits
Unlike tax deductions (which reduce the amount of your taxable income), tax credits are subtracted from the amount you owe in taxes. To claim child tax credits, you need to meet certain qualifying requirements, including each child being 16 or under at the end of the tax year.
The credit is based on income, so not all families are eligible. Taxpayers who are married and filing jointly and have a modified adjusted gross income of $400,000 or less are entitled to the full amount, as are single filers with a modified adjusted gross income of $200,000 or less. If your income is higher, the credit is reduced depending on how much more than the threshold you earn.
2. Other Dependent Credit
You may be eligible for the Other Dependent Credit if you have a dependent child aged 17 or older or if you’re responsible for supporting another dependent (such as a disabled family member or elderly parent). The credit is worth up to $500 and, like Child Tax Credit, tapers down once your income exceeds $200,000 for single filers and $400,000 for married joint filers.
3. Child and Dependent Care Credit
If you pay for someone else to take care of your children and/or other dependents while you work, you may be eligible for Child and Dependent Care Credit. It covers care costs for children under 13 or dependents of any age who require care and live in your home for at least half of the year.
4. Higher Education Tax Credits
There are also tax credits available for eligible students in higher education. The American Opportunity Tax Credit gives a maximum $2,500 annual credit for education expenses, including tuition, for a total of four years. The Lifetime Learning Credit doesn’t have a limit on the number of years it can be claimed and can apply to students taking courses in career skills, not just post-secondary education, unlike the AOTC.
There are income limits for both of these credits, though, with only those with a modified adjusted gross income of $80,000 or less for single filers (or $160,000 or less for married joint filers) entitled to the full credit. Anything over $80,000 and less than $90,000 (or over $160,000 and less than $180,000) is eligible to receive a reduced credit amount. Over $90,000 (or $180,000) is not eligible at all.
5. Adoption Tax Credit
The Adoption Tax Credit applies to qualified expenses relating to adopting a child, for both domestic and foreign adoptions. There’s an income threshold (the credit begins to taper off at a modified adjusted gross income of $223,410 for the 2022 tax year), and families who adopt special needs children are usually eligible for the maximum amount of credit.
6. 529 Plans
As well as helping you pay for your children’s education, 529 plans help you save money come tax season. They’re tax-advantaged investment accounts that are federally tax-deferred with tax-free withdrawals (providing the money is used for qualified expenses such as tuition fees, accommodation, and school supplies.
7. Self-Employed Health Insurance Deductions
If you’re self-employed, without an employer-subsidized health plan, you may be able to deduct certain healthcare-related insurance premiums, including medical, dental, and long-term care premiums for your whole family (including your spouse and children).
8. Get Professional Support with Tax Preparation
Tax rules can be complex, and working out exactly which tax credits and deductions you qualify for, as well as which strategies are going to work best for minimizing your returns, is often complicated. Are you up to speed with the most recent laws and regulations? Are you confident you’ll be holding on to as much of your income as possible?
The support of a professional is central to making the most of your hard-earned dollars. At CG Financial Services, we work with your tax preparer to ensure your money is working for you, with smart strategies to minimize the impact of taxes and maximize your family’s wealth. Get in touch with an advisor to start the conversation.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
Child Tax Credit. (n.d.). IRS https://www.irs.gov/credits-deductions/individuals/child-tax-credit
An overview of the credit for other dependents. (n.d.). IRS https://www.irs.gov/newsroom/an-overview-of-the-credit-for-other-dependents
Child and Dependent Care Credit Information. (n.d.). IRS https://www.irs.gov/credits-deductions/individuals/child-and-dependent-care-credit-information
American Opportunity Tax Credit. (n.d.). IRS https://www.irs.gov/credits-deductions/individuals/aotc
Lifetime Learning Credit. (n.d.). IRS https://www.irs.gov/credits-deductions/individuals/llc
Topic No. 607 Adoption Credit and Adoption Assistance Programs (n.d.). IRS https://www.irs.gov/taxtopics/tc607