Family Tax Deductions and Credits: What Do You Qualify For?
Late last year, Congress approved nearly $11 billion to fund the Internal Revenue Service for fiscal year 2015 – the lowest allotted amount since 2008, according to CNN Money. As a result, the IRS announced delays in processing refunds, particularly for those who file paper returns – all the more reason to do your taxes sooner rather than later if you’re expecting money back from the government.
Whether anticipating a refund or not, let’s take a look at some credits and deductions many taxpayers will benefit from if they have dependents – whether they be children or adults. An IRS defined dependent is either a:
1. Qualifying Child: Your child, a stepchild, foster child, sibling, step-sibling, or child of any of the aforementioned could be a qualifying child under specific circumstances. Adopted children are considered your children.
2. Qualifying Relative: This person has to be related to qualify as your dependent, but does not have to live with you. The qualifying relative cannot be your child, must have earned less than $3,950 last year, and must have provided less than half of her/his own support in 2014.
A common example under this scenario would be an aging parent who still lives alone, but with the financial support of a child or children. The parent might then be considered someone’s qualifying relative.
3. Qualifying Non-Relative: You can even claim a non-relative as a dependent if that person lives with you full-time and meets all the other qualifications. Dependents may meet the requirement because they are depending on you to pay for medical expenses.
A boyfriend/girlfriend living with you full time while you are paying their medical expenses and support may qualify as your dependent.
The qualifying child and qualifying relative tests are available by clicking the IRS link above. Special rules apply for people receiving support from two or more people. Read IRS Publication 504.
Dependent Exemptions & Deductions 2014
You, your spouse and your qualifying child, qualifying relative or other dependent are each entitled to a personal exemption of $3,950 for 2014 (if you are not subject to the Alternative Minimum Tax). In addition to the personal exemptions, consider these deductions for your qualifying child or relative:
2. Education Expenses: The maximum deduction is $4,000.
3. Education Savings Accounts: These allow you to withdraw investment and earnings tax-free if the money is used for secondary education costs.
4. Student Loan Interest: The limit is $2,500, and is phased out for unmarried individuals at $60K, and at $120K for couples filing jointly.
Dependent Credits 2014
Now for the ever-important credits to reduce your tax liability:
1. Child Tax Credit: A maximum of $1K for each child under 17.
2. Child and Dependent Care Credit: Usually applies for children under 13, and to costs of child care if you were working, looking for work or enrolled in school.
However, there are some complications involving nannies and caregivers. If you employ one, you may be required to allocate Social Security, Medicare and unemployment taxes; and may need to report the wages you paid to the IRS via a W-2. If you hired a caregiver through an outside agency, you might be off the hook for those responsibilities. Talk to your tax attorney or accountant for more information about nannies and caregivers.
3. Adoption Credit: Limit is $13,190 and phases out as Adjusted Gross Income rises from $197,880.