Preparing your taxes can be stressful enough as it is, without having to keep up with changes to the tax code and the almost endless year-end considerations. Here at Holdfast Wealth Management, we want to help parents take full advantage of all the tax deductions and credits available, whether you’re sending your child off to college, or bringing home your newborn. With only a few days to go before Tax Day, we’ll run down the list to make sure you have your bases covered!
1. Take advantage of education credits
Pursuing higher education or supporting a child in college is costly, but there are thankfully some important education credits available to parents. If you have a child who is pursuing higher education, there are two tax credits to be aware of: The American Opportunity Tax Credit (AOTC), and the Lifetime Learning Credit (LLC). We especially like tax credits because they reduce your actually tax liability dollar for dollar (while deductions are applied at your marginal rate).
These credits may be applied at the end of year to reduce your tax bill, or even possibly contribute to a refund! While both are beneficial for your taxes, they come with different pluses and minuses. For instance, the dollar value for the LLC is slightly lower ($2,000) and may be applied only once per return, but is available for the duration of the student’s education.
This differs from the AOTC, on the other hand, which has a slightly higher dollar value ($2,500), and may crucially be applied per student, but is only available for four years.
For a more detailed look at how the credits compare, check out this comparison chart from the IRS, which breaks down the benefits of each.
2. Deduct student loan interest payments
While many initially believed that the student loan interest payment deduction would be scrapped with the passing of the Tax Cuts and Jobs Act, it survived, and is still a deduction you definitely want to take advantage of.
Whether you’re paying down your own student debt, or sending a child off to college, you may be eligible to deduct up to $2,500 in interest payments from your taxable income; however, the dollar amount is limited depending on your modified adjusted gross income (MAGI), and is dependent on a few other stipulations as well:
In order to for interest payments to qualify as deductible, the loan must have been taken out for yourself, a spouse, or a dependent; the loan must have been used for educational expenses for a student enrolled at least half-time in a degree program, and not for personal expenses; lastly, the loan must be from a qualifying lending institution, and not a personal loan, as from a relative.
If you’re wondering if a loan in your name qualifies, try this online interview tool from the IRS.
3. Claim the adoption tax credit
Parents who have adopted a child may apply the adoption tax credit, which helps to cover certain costs associated with the adoption (such as travel expenses, meals, or court and attorney fees). With this credit, up to $13,000 in related expenses may be claimed the year your child’s adoption is finalized.
4. Apply the Child Tax Credit
The Child Tax Credit is available to parents with children who are 17 or under at the end of the year, and whose children reside with them more than half the year. Additionally, you must be able to claim legal or biological relation to your child.
For 2018, the child tax credit is worth up to $2,000, with a portion potentially qualifying for a refund, and is applicable to each child who meets the outlined criteria. This credit is impacted by income, with the credit phased out at $400,000 for joint filers, or $200,000 for single filers.
5. Recoup a portion of childcare costs
Childcare can be a financial hardship for many families, but the good news is that there’s a credit to help offset the expense, the Child and Dependent Care Credit. This tax credit is meant to lower the cost of care services for your qualifying child or children, in order to enable you (and/or your spouse, if filing a joint return) to work, or actively seek out employment.
If you pay for childcare for a dependent under the age of 13, you may claim this dollar-for-dollar tax reduction based on accrued childcare expenses. The credit is worth up to $1,050 for one child, and up to $2,100 for two or more children, and may be applied to kindergarten, nursery school, after-school or day camp programming.
One of the best ways you can set yourself up for financial success is by taking time now to consider your financial future. By setting and periodically assessing your budget, financial goals, and savings, you can help ensure that you have the funds you need to provide your family with a bright future.
Planning for the future can feel overwhelming, but it doesn’t have to be. Unsure where to start?