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Dependent Tax Deductions and Credits: Tax Exemptions, Deductions and Credits for Families

Updated for Tax Year 2020 / August 24, 2021 02:10 PM


OVERVIEW

Since 2017, there have been changes to many areas of taxation, including claiming dependents and the deductions and credits that go along with claiming them. Here's what to know about the dependent tax deduction and related credits to better navigate your family's taxes.


For information on the third coronavirus relief package, please visit our “American Rescue Plan: What Does it Mean for You and a Third Stimulus Check” blog post.


 

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As a family, you may have access to more tax deductions and credits than taxpayers without children. If you're not aware of these deductions and credits, you may be missing out on some tax savings.

If this is the first year you're filing your taxes on your own, you may not be aware of some of the recent tax changes that have affected taxes and deductions for families. Here's what you need to know so you can file your taxes on your own while claiming the deductions you're entitled to.

And if you don't want to go it alone, TurboTax can help by asking specific questions to make sure you get every deduction you qualify for.

The Tax Cuts and Jobs Act changed how families get deductions and exemptions

In December 2017, Congress passed the Tax Cuts and Jobs Act. It made significant changes regarding how some tax deductions and credits work for families. Most of these changes took effect in the 2018 tax year. Here are some of the key changes to be aware of and understand.

Removal of exemptions

The removal of personal exemptions is one of the largest changes. Before the 2018 tax year, you likely received a personal exemption for each qualifying member of your household. This may have included yourself, your spouse and any qualifying dependents.

In the 2017 tax year, the exemption typically resulted in a $4,050 reduction of taxable income for each one you qualified for. For a family that qualified for four exemptions, the total reduction of taxable income ended up being $16,200.

Starting in the tax year 2018, you could no longer claim personal exemptions. The removal of this popular reduction of taxable income may be partially or completely offset by the act's other changes, depending on your particular circumstances.

Standard deduction increase

While the new tax law removed personal exemptions, it also increased the typical standard deduction amounts.

In the tax year 2017, standard deduction amounts were:

  • Single: $6,350
  • Married filing separately: $6,350
  • Head of household: $9,350
  • Married filing jointly: $12,700
  • Qualifying widow(er): $12,700

In the tax year 2020, standard deduction amounts are:

  • Single: $12,400
  • Married filing separately: $12,400
  • Head of household: $18,650
  • Married filing jointly: $24,800
  • Qualifying widow(er): $24,800

For tax year 2021, the standard deduction amounts will be:

  • Single: $12,550
  • Married filing separately: $12,550
  • Head of household: $18,800
  • Married filing jointly: $25,100
  • Qualifying widow(er): $25,100

For some families, these higher standard deductions offset the loss of exemptions. For others, these higher standard deductions didn't completely offset the loss of personal exemptions. In those cases, the next change may have helped recoup part of the loss of exemptions.

In 2020 you can deduct up to $300 per tax return of qualified cash contributions if you take the standard deduction. For 2021, this amount is up to $600 per tax return for those filing married filing jointly and $300 for other filing statuses.

Child tax credit and credit for other dependents

Stimulus impact on the Child Tax Credit for 2021

Child Tax Credit Changes

The American Rescue Plan raised the maximum Child Tax Credit in 2021 to $3,600 for qualifying children under the age of 6 and to $3,000 per child for qualifying children ages 6 through 17. Before 2021, the credit was worth up to $2,000 per eligible child, and 17 year-olds were not eligible for the credit.

The Child Tax Credit changes for 2021 have lower income limits than the original Child Tax Credit. Families that do not qualify for the credit using the revised income limits are still eligible for the $2,000 per-child credit using the original Child Tax Credit income and phase-out amounts.

In addition, the entire credit is fully refundable for 2021. This means that eligible families can get it, even if they owe no federal income tax.

New, Temporary Advance Child Tax Credit Payments

The Child Tax Credit has been expanded by the American Rescue Plan Act, that was enacted in March of 2021. Part of this expansion is to advance the 2021 tax credit to families by sending them direct payments during 2021 rather than having them wait until they prepare their 2021 taxes in 2022. Most families do not need to do anything to get their advance payment. Normally, the IRS will calculate the payment amount based on your 2020 tax return. Eligible families will receive advance payments, either by direct deposit or check.

The amount that you receive will be reconciled to the amount that you are eligible for when you prepare your 2021 taxes. Most families will receive about one-half of their tax credit through the advance payments. If you receive too little, you will be due an additional amount on your tax return. In the unlikely event that you receive too much, you might have to pay the excess back, depending on your income level.

For updates and more information, please visit our 2021 Child Tax Credit blog post.

If you're doing your 2020 taxes, here's what you should know about the Child Tax Credit

The Tax Cuts and Jobs Act increased the child tax credit for tax years 2018 through 2020 from the old $1,000 limit. The new child tax credit results in up to a $2,000 credit per qualifying child age 16 or younger. If you owe no tax, up to $1,400 of the new child tax credit may be refundable using the Additional Child Tax Credit.

Children over age 16 aren't eligible for the child tax credit. However, these older children and other qualifying dependents may be eligible for a new tax credit of up to $500 called the credit for other dependents. Dependents must be a U.S. citizen, U.S. national or U.S. resident alien. They must also be a qualifying child or qualifying relative.

A qualifying child must meet the relationship, age, residency, support and joint return tests. A qualifying relative must meet the "not a qualifying child, member of household or relationship" test, gross income test and support tests. TurboTax asks questions to determine whether a person is a qualifying child or relative when you complete your tax return.

Both credits start phasing out, or being reduced, if your adjusted gross income exceeds $400,000 for married filing jointly filers or $200,000 for other filing statuses.

Adoption tax credit

If you have adopted or plan to adopt a child, you may be able to take advantage of the adoption tax credit. This nonrefundable tax credit allows you to claim a credit of up to $14,300 for qualifying adoption expenses for adoptions finalized in 2020.

The credit starts being reduced if your 2020 modified gross adjusted income exceeds $214,520 and completely phases out at $254,520. If you don't use the entire credit in the first year, you may be able to carry forward any remaining balance to future tax returns for up to five years.

Qualifying adoption expenses for eligible children include necessary and reasonable adoption fees, court costs, attorney fees, eligible travel expenses and other direct expenses in relation to adopting a child.

Eligible children must be under the age of 18 or be incapable of self-care due to physical or mental reasons. This credit does not apply to adopting a spouse's child.

Education-related deductions and tax credits

Education can be expensive. Tax deductions and credits may offset some of the costs.

American Opportunity Tax Credit

The American Opportunity Tax Credit is a partially refundable tax credit of up to $2,500. It can be claimed for qualifying education expenses for eligible students during the first four years of higher education. You get a 100% tax credit for the first $2,000 in eligible expenses. You also get a 25% tax credit for the next $2,000 of eligible expenses.

This credit is reduced if your 2020 modified adjusted gross income exceeds $80,000 for those filing single or $160,000 for those filing married filing jointly. There are other requirements to claim this credit.

Lifetime Learning Credit

The Lifetime Learning Credit is another option if you aren't eligible for the American Opportunity Tax Credit. You can't claim both this credit and the American Opportunity Tax Credit for the same student in the same year.

This credit is for up to $2,000 per tax year but starts phasing out when your 2020 modified adjusted gross income exceeds $59,000 for single filers and $118,000 for married filing jointly filers. The credit isn't refundable. It's calculated by taking 20% of up to the first $10,000 in qualified education expenses for qualifying students.

Tuition and fees deduction

If you can't take the American Opportunity Tax Credit or Lifetime Learning Credit, you may qualify for the tuition and fees deduction. As a deduction, this reduces taxable income rather than directly reducing your tax the way a tax credit does.

You can deduct qualified education expenses as an adjustment to income on Form 8917. Up to a $4,000 deduction is available if your modified adjusted gross income is up to $65,000 for single filers or up to $130,000 for married filing jointly filers.

You can take up to a $2,000 deduction if your modified adjusted gross income is over $65,000 up to $80,000 for single filers or is over $130,000 up to $160,000 for married filing jointly filers. You can't take this deduction if your modified adjusted gross income exceeds $80,000 if you file single or $160,000 if you file married filing jointly.

This deduction is only for qualified education expenses incurred by eligible people including yourself, your spouse or a qualifying dependent. This deduction is set to expire at the end of 2020.

Student loan interest deduction

You might be eligible for the student loan interest deduction if you paid interest on student loans during the tax year. This deduction can be up to $2,500 for qualifying student loan interest paid.

The deduction starts phasing out at a 2020 modified adjusted gross income of $70,000 for single filers and $140,000 for married filing jointly filers. If your modified adjusted gross income exceeds $85,000 for single filers or $170,000 for married filing jointly filers, the deduction isn't allowed at all.

Itemized deduction opportunities and changes

Itemized deductions could help your family claim more money in deductions than the standard deduction offers. The medical and dental expenses itemized deduction may be especially useful for families with many qualifying medical expenses. Any qualifying medical and dental expenses that exceed 7.5% of your adjusted gross income can be claimed as an itemized deduction for the 2020 tax year.

Suppose your family had high medical and dental expenses due to you, your spouse or a qualifying dependent's accidental injury or medical treatment. In that case, this could help you claim extra deductions if you already itemize deductions. Unfortunately, if you don't have enough itemized deductions to exceed the standard deduction, you won't benefit from the medical and dental expenses deduction.

Before the 2018 tax year, itemized deductions could be limited if your income exceeded certain limits. That limitation was removed in the Tax Cuts and Jobs Act tax reform.

Stimulus checks and the related tax credit

In the spring  and winter of 2020, Congress authorized two tax credits payable as stimulus checks to help ease the financial burden of the coronavirus pandemic. The tax credits are also available on your 2020 tax return, but the stimulus checks were advances of these tax credits. Unfortunately, not all people who are eligible for the tax credits in 2020 received stimulus checks.

The stimulus checks calculations were based on 2018 or 2019 tax return data. Your 2020 tax year numbers may vary from these amounts and if you qualify for a larger credit than you received in your stimulus checks, you may be able to claim the difference on your 2020 tax return. If it turns out that you're eligible for less based on your 2020 tax return, you don't have to pay back the difference.

Additionally, some people's situations may have changed that result in them now qualifying for a larger tax credit than the stimulus checks they received. For instance, you may qualify for a larger credit if you have a child born in late 2020 and you did not receive a credit for the child. Thankfully, you may be able to still claim whatever credit you're owed on your 2020 tax return, less any stimulus check amounts you received.

U.S. citizens and U.S. resident aliens may be eligible for up to $1,800 in tax credits if filing single, $3,600 in tax credits if filing married filing jointly and $1,100 tax credits per eligible child under age 17 as long as they meet the other requirements.

The stimulus check amount starts decreasing in $5 increments for each $100 of adjusted gross income over the following limits based on your filing status:

  • Single: $75,000.
  • Head of household: $112,500.
  • Married filing jointly: $150,000.

Annual increases due to inflation adjustments

Each year, the IRS makes annual inflation adjustments to certain items. These can help reduce your taxes owed compared to a scenario where the IRS didn't make inflation adjustments.

For instance, the IRS increased the standard deduction amounts from 2019 to 2020. The married filing jointly and qualifying widow(er) standard deduction increased by $400. The standard deduction for married filing separately and single taxpayers increased by $200. For those filing as a head of household, the standard deduction increased by $300.

While tax rates generally remain the same, the tax brackets slightly increase each year due to inflation. The particular tax brackets differ depending on your filing status.

Other notable changes for families for the 2020 tax year include a $2,000 increase of the phase-out limit for the Lifetime Learning Credit, a $220 increase of allowable qualified adoption expenses and a $103 increase in the maximum Earned Income Tax Credit for qualifying taxpayers with three or more qualifying children.

The Consolidated Appropriations Act (CAA) was signed into law on December 27, 2020 as a stimulus measure to provide relief to those affected by the pandemic. For tax year 2020, The CAA allows taxpayers to use their 2019 earned income if it was higher than their 2020 earned income in calculating the Additional Child Tax Credit (ACTC) as well as the Earned Income Tax Credit (EITC).

Other ideas to save on your taxes

Families have other ways they may be able to save on their taxes. For instance, business owners could employ their children within their businesses. If you do, you may be able to take a business expense for the wages that you pay your child. Your child's income may also receive a relatively low overall tax burden as long as the wages stay under the $12,400 standard deduction.

If your children are in college, you may want to consider purchasing a second home in their college town. This may allow you to take advantage of the mortgage interest and real estate tax deductions for second homes on your tax return. You would have to itemize to take these deductions, and they may not provide much benefit depending on your situation. Make sure to run the numbers before doing so.

Family life can be hectic. Don't let your taxes add to your stress level. TurboTax can help you efficiently file your tax return by asking simple questions about your situation to ensure you claim all of the credits and deductions your family qualifies for so you can get every dollar you deserve.

Remember, with TurboTax, we'll ask you simple questions about your life and help you fill out all the right tax forms. Whether you have a simple or complex tax situation, we've got you covered. Feel confident doing your own taxes.

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