credits

How Does the Recovery Rebate Credit Work?

The recovery rebate is a credit for taxpayers who either did not receive or received less than the full amount of their Economic Impact Payments. Here’s how it works for the 2021 tax year:

Economic Impact Payments and plus-up payments were issued during 2021 from March through December. If you received the full amount of the third Economic Impact Payment, then you do not need to include any information about this when you file your return.

However, if you didn’t qualify for the payment or received less than the full amount, then you can claim this as a credit on your 2021 tax return.

If you are missing any of the first and second stimulus payments, then you will need to claim this as a credit on your 2020 tax return.

 

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Children and Tax Benefits

With the upcoming birth of our son or daughter, I thought it would be appropriate to write about the tax benefits of raising children. The rules can get tricky, and your children must meet certain criteria to become your qualifying children for tax purposes. Here are a few highlights:

Dependency Exemption: For each qualifying dependent child, you can exempt from your income $4,000.

Child Tax Credit: For each qualifying child under 17 years of age you can receive a credit of up to $1,000 per child. The credit phases-out after your modified adjusted gross income is greater than $110,000 for filing jointly and $75,000 for filing as single or head of household.

Child Care Credit: If you pay for daycare, after-care or preschool so that you can work, you may be eligible for a credit of 20% to 35% of the cost, up to a maximum of $3,000 of qualified expenses for one child and $6,000 for two or more. Your children must be under age 13 to qualify.

Education Credits: There are several credits and deductions available for education expenses:

– The American Opportunity Credit provides a credit of up to $2,500 per eligible student for the first four years of college (100% of the first $2,000 of expenses and 25% of the next $2,000).

– The Lifetime Learning Credit provides a credit of up to $2,000 for an unlimited number of years (20% of the first $10,000 of expenses).

– The tuition and fees deduction provides a deduction of up to $4,000 as an adjustment to income (this means that you do not have to itemize).

– Student loan interest deduction allows for a deduction of up to $2,500 as an adjustment to income.

There are income limitations for each credit and deduction which vary widely based upon your modified adjusted gross income and filing status.

Income Shifting: If you are self-employed, you may be able to hire your minor children, pay them wages, and not have to pay income taxes or payroll taxes. Even if you do not own a business you may still be able to shift investment income to your children to minimize taxes. It takes a lot of planning, but strategizing can save a lot of taxes.

These are just some of the tax benefits to having children. Hopefully this will help to offset some of the cost of raising a family.