Along with the loss of certain tax deductions and expansion of the standard deduction in last year’s tax act, it’s a good time to remind everyone with school age children about benefits that are easy to miss.
The child tax credit, which was bumped up to $2,000 per child, is intended to offset the many expenses of raising children and it is refundable generally up to $1,400. The maximum amount of adjusted gross income that you can have and still qualify for the credit was increase dramatically as well. Unfortunately, if your son or daughter is over 16 years old, you can’t use this credit to trim your tax bill.
However, the new tax law added a separate $500 (unfortunately this one is non-refundable) credit for dependents who don’t qualify for the child tax credit. So, your older children can still save you some money at tax time – even if they’re in college. You can also claim the credit for older relatives that you’re caring for at home. The credit will help fill some of the void left by the new tax law’s elimination of personal exemption deductions, but then need to be a your dependent,
Note, though, that the combined total of both the child credit and the credit for other dependents is phased out if your adjusted gross income is more than $200,000 ($400,000 for married couples filing jointly).
A credit is so much better than a deduction; it reduces your tax bill dollar for dollar. So missing one is even more painful than missing a deduction that simply reduces the amount of income that’s subject to tax. In the 24% bracket, each dollar of deductions is worth 24 cents; each dollar of credits is worth a whole dollar.
Let’s turn now to student-loan interest paid by mom and dad. Generally, you can deduct interest only if you are legally required to repay the debt. But if parents pay back a child’s student loans, the IRS treats the transactions as if the money were given to the child, who then paid the debt. So, as long as the child is no longer claimed as a dependent, he or she can deduct up to $2,500 of student-loan interest paid by mom and dad each year. There is no need to itemize so it’s not affected by the higher standard deduction.
With the costs of raising our children, each and every tax savings dollar helps. While, with the paying student loan interest situation, because they are not liable for the debt, mom and dad can’t claim the interest deduction even though they actually foot the bill, there is still a tax benefit. Hopefully your child will share their tax refund.
Whether you are a business, individual, or non-profit – we will outline specific steps you can take to minimize taxes, maximize loan eligibility, or enhance the value of your property. With one call or email we will provide you with a professional, complimentary financial Statement evaluation – no obligation. Just visit Czarbeer.com/tax-offer or contact us at firstname.lastname@example.org, or call (212) 397-2970 and we will be happy to help you and answer your questions.