Tax Filing 2021: how much can I discount per child?
There are three tax credits to keep in mind when filing your tax return and you have children or dependents you claim. Here’s a rundown of them.
If you have children or support someone in your family you may be eligible for one of the following tax credits: the Child Tax Credit, the Child and Dependent Care Credit and the Earned Income Tax Credit. Congress is currently working on legislation that would enhance these credits with some of the provisions going into effect working like advanced direct payments similar to the $1,400 stimulus checks in the bill.
Importantly for filing this year, the American Rescue Plan would see an enhanced child tax credit while removing the current earnings floor. These would also go out as direct payments starting in July with families seeing as much as $300 per child per month. The child and dependent care credit will see more expenses a higher amount of expenses to be claimed, while the earned income tax credit would see increases for those without children.
The Child Tax Credit
The current Child Tax Credit is worth up to $2,000 per qualifying child and $500 per qualifying dependent. The credit begins to phase out when adjusted gross income reaches $200,000 for single filers and $400,000 for married couples filing jointly. But there is also an income floor of $2500 in minimum income. The refundable amount is equal to 15% of your earned income over $2,500, up to the maximum $1,400 credit, but the $500 per qualifying dependent is not refundable.
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Eligibility to claim the Child Tax Credit
The child must be:
- under 17 on 31 December
- be a U.S. citizen, resident, or national, and
- have a Social Security number which you must provide on your tax return.
- live with you for over half the year
- provide less than half of his or her own support
A qualifying child can be any of the following: your son, daughter, stepchild, adopted child, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them—for example, your grandchild, niece, or nephew.
The IRS has an online questionnaire you can complete to determine if you have a qualifying child. Visit the Is My Child a Qualifying Child for the Child Tax Credit? page at the IRS website.
When filing you taxes you can use a number of Free File programs through the IRS with tax preparers. Most of these tax software systems will lead you through the process and calculate the credits for you.
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The Child and Dependent Care Tax Credit
If you spend money for child care so that you and your spouse can work, you may be eligible to use the child and dependent care credit. There is no income ceiling on this credit, but the amount trails off for higher incomes but never goes down to zero. The child and dependent care credit is nonrefundable so you will not get back more from the IRS than you have paid in but it can reduce your tax burden if you would otherwise owe money.
The amount of the credit is based on a percentage of the child care expenses you incur on days worked to enable you and your spouse to earn income. The percentage ranges from 20% to 35% of expenses, depending on your income. Taxpayers with an AGI $43,000 and up use the 20% amount and those with an AGI $15,000 use 35%. Those with AGIs between those two amounts use a percentage based on a sliding scale.
You can claim expenses up to $3000 for a qualifying child or other dependent under the age of 13, and $6,000 for two or more children. As well in the case that your spouse is disabled and physically or mentally incapable of caring for him or herself, or you have any disabled dependent who has income of less than $4,300 per year, you can also take advantage of this credit.
You must keep track of your receipts for expenses related to child care that you wish to claim. For a child dependent you can only claim expenses up to the child’s 13th birthday.
To claim the credit, you’ll have to list on your tax return the name, address, and Social Security number or Employer Identification number of the people you pay for dependent care, so you will need to have this information when preparing your income-tax filing. You must also file IRS Form 2441, Child and Dependent Care Expenses with your tax return.
The IRS has an online questionnaire you can complete to determine if you qualify for the child and dependent care credit. Visit the Am I Eligible to Claim the Child and Dependent Care Credit? page on the IRS website.
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The Earned Income Tax Credit
The earned income tax credit (EITC) is designed to support to low- and moderate-income working parents. Workers without qualifying children can also receive a credit but don’t benefit much from the program. Workers receive a credit equal to a percentage of their earnings up to a maximum credit varying by family size. Families can claim up to three children under the EITC with the amount of the credit phasing out once a family crosses an earnings threshold of $19,330.
The maximum credit for families with one child is $3,584, while the maximum credit for families with three or more children is $6,660. Childless workers can receive a maximum credit of only $538. This credit can be used in conjunction with the child tax credit for families with three or more children.
Individuals and families must file an income-tax return in order to benefit from this program even if they normally aren’t required to file a tax return.
The best advice is to consult a tax professional to see how you can best take advantage of any and all of these programs to reduce your tax bill to the lowest amount or even get a higher refund than you may have expected.
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