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Tax Credits for Families With Children And Dependents

Households With Kids or Other Dependents May Qualify for These Tax Breaks

There are a variety of federal tax breaks available for taxpayers with children and/or dependents, which can help lower the amount of taxes you owe the IRS. Some of these tax benefits have been expanded by recent legislation in response to the COVID-19 pandemic.

Here’s a breakdown of the most popular and useful tax breaks for families.

The Child Tax Credit (CTC)

The Child Tax Credit is normally available to eligible taxpayers with qualifying children who are age 17 or younger. It is usually a partially-refundable tax credit that allows people to claim up to $2,000 per child.

However, there have been recent changes to the Child Tax Credit, thanks to the American Rescue Plan Act (ARPA) of 2021. The ARPA temporarily opened eligibility for the Child Tax Credit by removing the income threshold and making it fully refundable for lower income households. Additionally, the ARPA has temporarily increased the maximum amounts you can claim for the Child Tax Credit to $3,600 for each younger child (under age 6) and $3,000 for each older child (between ages 6 and 17).

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The Child & Dependent Care Tax Credit

The Child and Dependent Care Tax Credit is normally available to eligible taxpayers who pay for someone to care for their child, spouse, or other dependent. This tax credit is designed to help with the expenses of child/dependent care, such as in-home care nurses or daycare.

The American Rescue Plan Act of 2021 also makes some temporary changes to this tax credit by increasing the maximum amount you can claim to $8,000 for taxpayers with one child/dependent or $16,000 for taxpayers with two or more children/dependents.

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The Adoption Tax Credit

The Adoption Tax Credit is designed to help offset the costs of adopting a child, which may include adoption fees, court costs, attorney fees, traveling expenses, and other expenses that are directly related to the legal adoption of an eligible child (under age 18). The maximum amount you can claim for the Adoption Tax Credit is currently $14,300 per child.

The income limit for the Adoption Tax Credit is based on your Modified Adjusted Gross Income (MAGI). For tax year 2020, you will receive the full credit amount if your MAGI is below $214,520. If your MAGI is above $214,520 for 2020, the amount of your tax credit will be reduced gradually up until the income threshold – taxpayers who earn $254,520 or more do not qualify for this tax credit.

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Education Tax Breaks

The federal government provides several different tax breaks to help people with the costs of education. Here are some of these education tax breaks:

The American Opportunity Tax Credit (AOTC)

The AOTC is a partially-refundable tax credit for qualified education expenses that were paid for an eligible student during the first 4 years of higher education. The maximum amount you can claim for the American Opportunity Tax Credit is $2,500 per student. Up to 40% ($1,000) of this tax credit is refundable.

The Lifetime Learning Credit (LLC)

The LLC is a tax credit for qualified tuition and education-related expenses that are paid for a qualified student who’s enrolled at an eligible educational institution (which may include undergraduate, graduate, and professional degree programs). The maximum amount you can claim for the Lifetime Learning Credit is $2,000 per year – however, there is no limit on how many years you can claim this tax credit.

The Student Loan Interest Tax Deduction

Student loan interest is defined as “interest you paid during the year on a qualified student loan” and it “includes both required and voluntary pre-paid interest payments.” Under this tax deduction, you may deduct either $2,500 or the amount of interest you actually paid during the year, whichever is less. The student loan interest deduction is classified as an adjustment to income, which means you do not have to itemize deductions in order to claim this tax break.

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The Earned Income Tax Credit (EITC)

The Earned Income Credit is a fully refundable tax credit designed for low- and moderate-income workers and families. The American Rescue Plan Act of 2021 made some temporary changes to the EITC.

In general, the amount of your Earned Income Tax Credit will be larger if you earn less income. For 2020 tax returns, the Earned Income Tax Credit is worth from $538 to $6,660, depending on your filing status and the number of children you have. (However, you do not need to have a child in order to qualify for the EITC.) Note that you cannot claim the EITC if your filing status is “Married Filing Jointly.”

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