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Tax Credits for Parents: What You Need to Know

by | Jun 1, 2024 | 2024, Accounting, Tax Credits and Deductions, Tax planning | 0 comments

Raising a child can of course be expensive, including the cost of child care, basic living expenses, and college tuition, and these prices are frequently rising. However, parents may benefit from tax credits for schooling, child care, or for simply having kids.

The child tax credit (CTC) is a federal tax benefit that offers financial assistance to taxpayers with children. This year, the credit has been in and out of the headlines as legislators attempted — but ultimately failed — to increase it in time for the 2024 filing season. As a consequence, the tax benefit remained unaltered as filers hurried to complete their taxes by the April 15 deadline: those with children under 17 may claim up to $2,000 per qualified dependent, with $1,600 possibly refundable.

About the Child Tax Credit

The current child tax credit is a nonrefundable tax benefit for taxpayers with dependent children under the age of seventeen. The credit might lower your tax burden dollar for dollar. Some taxpayers may be entitled for a partial return of the credit under the “additional child tax credit.” To be eligible, taxpayers and their children must fulfill specific conditions, including the child’s age and relationship to the individual claiming them. Taxpayers must also fulfill specific income requirements, as the benefit is phased down for high incomes. If your modified adjusted gross income exceeds the maximum for your filing status, your credit amount may be reduced, or you may be considered ineligible.

How much is the child tax credit worth?

In 2023, the child tax credit was worth $2,000 per eligible dependent child if your modified adjusted gross income was $400,000 or less (married filing jointly) or $200,000 or less (other filers). If your MAGI exceeds the aforementioned restrictions, your credit is decreased by $50 for every $1,000 you earn above the barrier.

The refundable component, also called the additional child tax credit, was valued up to $1,600.

Child tax credit 2024

For the 2024 tax year (tax returns filed in 2025), the child tax credit will be worth $2,000 per qualifying child, with $1,700 being potentially refundable through the additional child tax credit.

Requirements: Who qualifies for the child tax credit?

Taxpayers can claim the child tax credit when they file their yearly returns. Generally, you and your eligible child must meet seven requirements: age, relationship, dependent status, residency, financial support, citizenship, and income.

  • Age: Your child must have been under the age of 17 at the conclusion of the tax year.
  • Relationship: The kid you’re claiming has to be your son, daughter, stepchild, foster child, brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of those persons.
  • Dependent status: You must be able to correctly claim the child as a dependent. The child also cannot file a joint tax return unless they are claiming a refund of withheld income taxes or estimated taxes paid.
  • Residency: The child you’re claiming must have resided with you for at least half a year (exceptions apply).
  • Financial assistance: You must have contributed at least half of the child’s support throughout the previous year. In other words, if your qualifying child has financially supported herself for longer than six months, they are most likely not qualified.
  • Citizenship: According to the IRS, your child must be a “U.S. citizen, U.S. national, or U.S. resident alien,” with a valid Social Security number.
  • Income: Parents or caregivers claiming the credit are often not allowed to exceed specific income limits. Depending on how much your salary surpasses that threshold, the credit is gradually lowered until it is completely eliminated.

How to claim the child tax credit

For tax year 2023, you can claim the child tax credit and the additional child tax credit on the federal tax return (Form 1040 or 1040-SR) that was due on April 15, 2024, or Oct. 15, 2024, with a tax extension.

You will also need to complete Schedule 8812 (“Credits for Qualifying Children and Other Dependents”), which must be filed with your 1040. This schedule will assist you in calculating your credit amount and how much of the partial refund you may be entitled to receive, if applicable.

Additional child tax credit

If you are eligible for the CTC but are unable to take full benefit because you do not owe taxes or owe less than your credit amount, you may be able to receive a partial refund by claiming the extra child tax credit. To claim the ACTC, all of the aforementioned income and dependent conditions must be satisfied; however, there are a few extra rules:

  • To qualify, you must have at least $2,500 in earned income or three qualified dependents. Earned income is generally derived from employment or self-employment. It excludes money from passive sources like dividends, pensions, welfare, and unemployment.
  • You or your partner (if married filing jointly) cannot exclude foreign-earned income from your taxes by filing Form 2555 or Form 2555-EZ

State child tax credits

In addition to the federal child tax credit, certain states, including California, Colorado, and New York, have state-level CTCs that you may be able to claim when submitting your state return. For further information, go to your state’s department of taxes website.

What is the $500 credit for other dependents (ODC)?

If your kid or a relative you care for does not fulfill the CTC eligibility requirements but may be claimed as a dependent, you may be eligible for a $500 nonrefundable credit known as the “credit for other dependents.”

Earned Income Tax Credit (EITC)

The number of children you have also affects your eligibility for the Earned Income Tax Credit, which can dramatically lower the amount of tax you pay. In 2023, the Earned Income Tax Credit will be available for families with three or more qualified children and wages less than

  • $56,838 as a single person, or
  • $63,698 as a married couple filing jointly.
  • The income thresholds then drop according to the number of children you have.

Child and dependent care credit

Parents who spend a lot of money on child care may also be eligible for tax savings.

For children under the age of 13, the child and dependent care credit can pay up to 35% of their child-care expenditures, or up to $3,000, since 2023. A second kid may potentially make you eligible for up to $3,000. Your employer may also deduct up to $5,000 of your taxable earnings for eligible child-care costs. The employer deduction may not be combined with the kid and Dependent Care Credit, making it less appealing if you have more than one kid.

School tax benefits

If you are sending your children to school, you may take advantage of a variety of tax benefits. Some states provide advantages to parents who pay for catholic school tuition and supplies for students in kindergarten through high school. However, federal education benefits are often limited to college or postsecondary education.

  • Federal education benefits, like child care, are provided in the form of credits and deductions.
  • These benefits do not overlap, so you must understand which ones you are entitled to and which you should seek.

The American Opportunity Credit provides a tax credit of up to $2,500 for tuition and related expenditures for each of the first four years of attending college at least half-time.

  • Individuals earning no more than $80,000 and couples earning no more than $160,000 qualify for the full American Opportunity Credit.
  • The credit tapers down over the following $10,000 in income ($20,000 if married filing jointly).

Students enrolled in non-degree and career skill training programs are eligible for the Lifetime Learning Credit, which has lower income limitations. The maximum eligibility for the Lifetime Learning Credit is an income limited to:

  • $80,000 for single filers
  • $160,000 for couples filing jointly in 2023

There are some key differences to consider when choosing between the American Opportunity Credit and the Lifetime Learning Credit:

  • The Lifetime Learning Credit is accessible for each household, whereas the American Opportunity Credit is offered for each individual student.
  • The Lifetime Learning Credit does not consider felony drug charges, is accessible year after year, and just requires participation in one course.
  • The first 40% (up to $1,000) of the American Opportunity Tax Credit is refundable, so you can get it even if your tax is zero.

529 plan

Qualified tuition plans, often known as 529 plans, provide another method to save on taxes while providing for your child’s educational needs. A 529 plan is neither a deduction nor a credit. It’s a tax shelter.

The Internal Revenue Service-authorized state-by-state 529 programs allow you to invest and earn interest without having to pay federal income taxes. In most circumstances, it also eliminates state income taxes.

  • You must guarantee that the withdrawals are used for acceptable educational expenditures, such as tuition and room and board.
  • Beginning in 2018, these eligible education costs include private school tuition from kindergarten to high school.
  • If you do not spend the money on eligible costs, you will be subject to income taxes once it has been spent.

Before initiating a 529 plan, the Securities and Exchange Commission suggests that you analyze your entire financial condition. After all, there’s no use in putting money into a limited account for future savings if you’re now struggling to pay your obligations.

If you need help filing your taxes, you can be certain that PSA CPA will handle the process for you, step by step.

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