Dependent Tax Deductions and Credits for Families
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.
Key Takeaways
- The Child Tax Credit can reduce your taxes by up to $2,000 per qualifying child aged 16 or younger. If you do not owe taxes, up to $1,700 of the Child Tax Credit may be refundable through the Additional Child Tax Credit for 2024.
- If you adopt a child, you may qualify for the Adoption Tax Credit, a nonrefundable tax credit that allows you to claim a credit of up to $16,810 for qualifying adoption expenses in 2024.
- If you or your dependent is pursuing a degree at a school, you may qualify for the American Opportunity Tax Credit, a partially refundable tax credit of up to $2,500.
- If you paid interest on qualifying student loans during the tax year, you might be eligible to deduct up to $2,500 of that interest with the student loan interest deduction.
Family matters
As a family with children, 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, 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 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
- Surviving Spouse: $12,700
For tax year 2024, the Standard Deduction amounts are:
- Single: $14,600
- Married Filing Separately: $14,600
- Head of Household: $21,900
- Married Filing Jointly: $29,200
- Qualifying Surviving Spouse: $29,200
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.
Child Tax Credit and credit for other dependents
The Tax Cuts and Jobs Act increased the Child Tax Credit 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 $1,700 of the Child Tax Credit may be refundable using the Additional Child Tax Credit for 2024.
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.
TurboTax Tip:
If you own a business, employing your child might enable you to take a business expense for the wages that you pay your child. The child's income usually is taxed at a relatively low rate when the wages stay under the 2024 Standard Deduction of $14,600.
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 $16,810 for qualifying adoption expenses for adoptions finalized in 2024.
The credit starts being reduced if your 2024 modified gross adjusted income exceeds $252,150 and completely phases out at $292,150. 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 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. You can claim the credit for each qualifying student on a tax return.
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 modified adjusted gross income exceeds $80,000 for Single filers and $160,000 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. You can only claim one Lifetime Learning Credit per tax return per year.
Tuition and fees deduction (2020 and earlier)
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 expired 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 2024 modified adjusted gross income of $80,000 for Single filers and $165,000 for Married Filing Jointly filers. If your modified adjusted gross income exceeds $95,000 for Single filers or $195,000 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 expense itemized deduction may be especially useful for families with many qualifying medical expenses. Qualifying medical and dental expenses that exceed 7.5% of your adjusted gross income can be claimed as an itemized deduction.
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 by the Tax Cuts and Jobs Act.
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 is increasing the Standard Deduction amounts from 2024 to 2025. The Married Filing Jointly and Qualifying Surviving Spouse Standard Deduction increases by $800. The Standard Deduction for Married Filing Separately and Single taxpayers increases by $400. For those filing as a Head of Household, the Standard Deduction increases by $600.
While tax rates generally remain the same, the tax brackets increase slightly each year due to inflation. The particular tax brackets differ depending on your filing status.
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 $14,600 Standard Deduction for 2024.
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 returns and ensure you claim all of the credits and deductions your family qualifies for so you can get every dollar you deserve.
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