At the beginning of every year, we’re required to file taxes. If you’re not an accounting professional, the process is long, confusing, and frustrating. With so many questions, filing your taxes can quickly become overwhelming, and it’s even worse when you end up owing a big chunk of money to the government after all of that work.
Unfortunately, there is no legal way to get out of filing and paying your taxes every year (and no one wants to end up in jail over tax evasion), but if you’re a parent, then there are several tax credits and deductions that can help chip away at what you owe. These benefits are designed to give working families a little bit of a break — and who knows, they could be what takes you from owing money to getting a big refund. But, to take advantage of them, you have to know what they are.
Let’s get into it.
Income Tax 101 & The Difference Between Tax Credits and Deductions
Tax credits and deductions help reduce how much money you owe to the government in taxes, but they do it differently. To understand how they each work, you’ll need a simplified, brief crash course on how income tax is calculated:
Gross Income: This is how much money you (and a partner/spouse, if you’re filing jointly) made throughout the year, pre-tax. Your salary is $50,000 and your partner is $40,000. Together your gross income is $90,000. (Note: any other money that you brought home and can be taxed, such as bonuses, capital gains, and interest income, are also calculated into gross income)
Net Income: This is the amount of money you brought in for the year after taxes, including federal income tax, state income tax, social security, Medicare, and any other pre-tax withholdings taken out of your paychecks, such as retirement savings, health/dental/vision insurance, etc.
Adjusted Gross Income (AGI): This is your net income minus other IRS-qualifieddeductions (hint: that word is important), such as student loan interest paid, IRA contributions, self-employment tax, business expenses, HSA contributions, etc.
Taxable Income: This is your AGI minus itemized deductions such as home mortgage interest, property taxes, charitable contributions, and medical/dental insurance (if it wasn’t withheld from your paycheck and you paid after taxes).
The more you can chip away at your taxable income, the better it will determine which tax bracket you fall into for federal taxes (this can range anywhere between 10% to 37% of your taxable income). The only way to lower your taxable income is through IRS deductions.
After your taxable income is calculated, you’ll see how much tax you owe for the year. From there, you’ll subtract the amount you’ve already paid into taxes (through paycheck withholdings or quarterly payments) and any credits you’re eligible for to get your final number. That last number will determine whether you owe the government money or if they owe you a refund.
Both credits and deductions offer benefits, but how much each one helps depends on where you fall within your income bracket. For example, if you’re $1,000 away from a lower tax bracket, a $2,000 deduction is beneficial. However, if you’re $10,000 away from a lower tax bracket, a $2,000 credit will benefit you more.
Tax Breaks for Working Families
All government tax breaks come in the form of credits or deductions. Each one has its own rules, such as income caps and phase-outs, and amounts can vary year-to-year depending on the government's different bills and policies. Here are some of the federal tax breaks that are very useful for working families:
Child Tax Credit (credit per child living in the home)
Child and Dependent Care Tax Credit (percentage of costs paid for daycare or dependent care)
Health Savings Account Contribution Deduction (money you paid into your HSA)
Savers Credit (percentage of total contributions into IRA, 401(k), 403(b), or certain other retirement savings accounts)
Home Mortgage Deduction
State and Local Tax Deduction (up to a certain amount)
Medical Expense Deduction (there are a lot of rules here, but helpful if someone in the family is chronically ill with high medical bills)
American Opportunity Tax Credit (up to a certain amount spent on education expenses, including tuition, books, equipment, and school fees)
2021 Recovery Rebate Credit of up to $1,400 for babies born or dependents added in 2021 (making up for missed stimulus payment in 2021 - income limits apply)
Expanded Child Credit: $3,000 for kids 6-17 years old, $3,600 for kids five and under (income limits apply; also, half of your total credit amount may have already been directly deposited to you monthly between July and December of 2021)
Child and Dependent Care Credit Increase: 35-50% of care expenses up to $8,000 for one child or $16,000 for two or more children (total maximum benefits are $4,000 for one child, $8,000 for two or more children; income limits apply)
Lifetime Learning Credit income limit increased (but tuition and fees cannot be deducted)
Covid-related sick or family leave tax credit for self-employed individuals
Get Help From a Pro
There are so many credits and deductions for families that hiring a professional accountant to help you do your taxes is worth hiring. While using an online platform may seem quick and easy, chances are high you’re unknowingly missing out on tax breaks. A professional accountant can help determine if you’re better off taking the standard deduction (which is what a lot of tax software defaults to) or itemizing your return to avoid paying more than you should. Plus, if you are self-employed, whether you’re a full-time contractor or you sell something on Etsy as a side hustle, you can deduct tax preparation as a business expense.
We’re in the thick of tax season right now, so be sure to file before Monday, April 18 (it usually falls on April 15, but we get a couple of extra days this year thanks to the weekend). If you’ve already filed and you think you missed out on many benefits, contact an accountant or tax preparer to see if they can help you file an adjustment because 2021 has some rare one-time benefits that you do not want to miss.
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