If you’re new to preparing your own income tax return or filing with family for the first time it’s important to make sure you’re taking advantage of every deduction that you’re entitled to. Families can frequently save more on their taxes than a single person. You wouldn’t be the first to wonder how you can get the most out of your tax refund.
The first step is to make certain that you understand who you can claim as a dependent, and which family-related deductions and exemptions will give you the greatest tax benefit.
If you are filing as married with dependents, and want to make sure you are getting all of the applicable deductions for your circumstance, keep reading to learn about 4 ways in which your family will affect your refund.
1. Tax Exemption for Dependents
An exemption is an amount of money you can deduct from your adjusted gross income simply for having dependents. Much like tax deductions, exemptions for yourself and qualifying family members reduce the amount of income on which you will be taxed.
For 2017 reporting, you can claim a $4,050 exemption for each qualifying child. This can include your children or stepchildren, foster children, siblings or step-siblings, or descendants of any of these, such as grandchildren or nieces and nephews. To qualify for the exemption, the child must live with you more than half of the year and be under 19 years old at the end of the year, or under 24 and a full-time student. Full-time students are those who attend school for at least part of 5 months out of the year
You are no longer required to show that you provide more than half of the child’s support, as was the case under the rules in effect a few years ago. However, in order to claim an exemption, the child cannot provide more than half of his or her own support.
If you are married, this also entitles both you and your spouse to a $4,050 personal exemption in 2017.
2. Exemptions for Other Relatives
If you have relatives such as parents or grandparents living in your household, or if you financially support relatives who do not live with you, you can claim a dependent exemption for a qualifying relative who is not a qualifying child, as long as the supported person meets the 5 criteria described by the IRS.
These criteria are:
- Citizenship: The person must be a citizen or resident of the U.S. or a resident of Canada or Mexico.
- Support: You must have provided over half of his or her support in the form of money, food, clothing, and other basic needs.
- Gross Income: The person must have had less than $4,050 of gross income in 2017
- Joint Return: The person must not have filed a joint income tax return with anyone else.
- Relationship: The person must be either a relative or a full-time member of your household.
If someone living in your household meets these criteria, you are entitled to claim them as a dependent on your taxes. It is important to note that if you are a business owner or contractor and file with a form 1040, you will not receive a refund as you would with normal W-2 filing because no taxes are being withheld from your income during the year, instead you will be required to make estimated tax payments at the time of filing.
3.Claiming a Dependent When Divorced or Separated
if you are divorced or legally separated from a spouse, it may not be simple, nor is there an automatic rule to determine who gets to claim a child as a dependent. It’s common for the custodial parent to claim the dependent. But the noncustodial parent may also claim an exemption for the dependent if he or she provided half of the child’s support.
The noncustodial parent may also claim the dependent in question if a divorce or separation decree from the custodial parent says the noncustodial parent can claim the dependent on their taxes.
If there’s any doubt about which parent will claim the child or children in question, it’s best to communicate with the other parent before you both file. When both parents claim the child, only the first filed return will be accepted.
4. Child Tax Credits
To claim the Child Tax Credit, you must determine if your child is eligible. There are seven qualifying factors that your eligibility to receive this tax credit. You and/or your child must meet all seven to claim this tax credit.
- Age: To qualify, a child must have been under age of 17 at the end of the tax year for which you claim the credit.
- Relationship: The child must be your biological or adopted child, a stepchild, or a foster child placed with you by a court or authorized agency. You can also claim your siblings and step-siblings, as well as your nieces, nephews, and grandchildren if they meet all other criteria.
- Support: To qualify, the child cannot have provided more than half of his or her own financial support during the tax year.
- Dependence: You must claim the child as a dependent on your tax return and they must meet all criteria for you to legally do so.
- Citizenship: The child must be a U.S. citizen, a U.S. national or a U.S. resident alien.
- Residence: The child must have lived in your household or have been for more than half of the tax year for which you claim the credit, However, children who were born or died during the tax year are considered to have lived with you for the entire year. This also applies to any children who have been temporarily absent from the household due to school, vacation, business, medical care, military services or detention in a juvenile facility.
- Family Income: The child tax credit is reduced if your modified adjusted gross income is above certain amounts, which are determined by your tax-filing status. In 2017, the phase-out threshold is $55,000 for married couples filing separately; $75,000 for single, head of household, and qualifying widow or widower filers; and $110,000 for married couples filing jointly. For each $1,000 of income above the threshold, your available child tax credit is reduced by $50.
These are 4 ways that your family greatly impacts your return, but there are other deductions and exemptions for which you may qualify. We recommend talking to a professional financial advisor to discuss your personal circumstances and filing needs.
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