14 Tax Deductions That Parents and Grandparents Shouldn’t Overlook

It’s that time of year that a lot of people dread: tax season. Taxes can be very confusing when it comes to knowing what you can and can’t claim, deduct or write off. And the rules are ever changing, so keeping up to date with the current year is important. Hiring a tax professional is one way to help you ensure you are doing it all right, but that can be costly. Whether you hire a tax professional or not, the following are some important tax credits and deductions you should be looking for as a parent or even as a grandparent when filing your taxes this year.

Child Tax Credit

If you have a child dependent living with you under the age of 17 years old, you can qualify for a $2,000 credit per child. This is true as long as your modified adjusted gross income is under $400,000 for married couples filing jointly or under $200,000 for those filing singly.

Child Tax Credit on the State Level

The previously mentioned child tax credit is available at the federal tax level, but you could be missing out if you don’t check on the state level, too. “As a parent, you not only want to check the list of federal tax deductions, there are state tax breaks as well,” says R.J. Weiss, a certified financial planner and founder of the personal finance site The Ways to Wealth. “While the legal names and amounts of these credits and deductions vary, they can save you a substantial amount of money on your state taxes. A great resource to check out is Tax Credits for Workers and Their Families, which allows you to search for specific deductions in your state.” Many states offer a comparable child tax credit, so it’s important to check the specifics for your state.

Child Care Tax Credit

If you are paying for childcare while you work or look for work, you can qualify for the child care tax credit. This is a credit that directly reduces what you owe in taxes. This tax credit applies to you as long as the child in care was under 13 years old last year, and you earned an income. Assuming you qualify, you could get a credit of up to 35% of $3,000 that you may have paid in childcare for one child or up to 35% percent of $6,000 paid in childcare expenses for two or more children.

Dependent Care Accounts

In addition to the childcare tax credit, you can also put money into an employer-established dependent care flexible spending account. This is pre-tax money that you can use for childcare and other dependent care expenses. The money put into this account is not taxed as income.

Adoption Tax Credit

If you adopted a child and the adoption was finalized in the 2019 tax year, then you may qualify for a tax credit up to $14,080 per child. As long as the adopted child isn’t a stepchild, then you can claim legal fees, travel, and meal expenses. If the child you adopt has special needs, then you can generally claim the maximum amount of the credit of $14,080.

529 College Savings Plans

These plans are sponsored by your state or a higher education institution and are set up to help families plan for and save for future education costs. There are two different types of plans: prepaid tuition plans and education savings plans. Prepaid plans are set up so that you purchase tuition to a specific school (usually in-state public schools), while savings plans allow you to set up an investment account to be used for future higher education expenses.

If you have a 529 college savings plan for your child set up, you are investing after-tax money into it. The earnings it incurs are tax-deferred, and if the money is used to pay for qualified higher education expenses, then that makes it entirely tax free. “Contributions to 529 plans are tax deductible at the state level,” said Thomas Hoffman, a CPA at McCurdy & Associates based in Columbus, Ohio. “That means that you won’t receive any benefit on your federal tax return, but you can receive a credit or deduction on your state tax return.” Each state has its own rules regarding 529 plans though, so Hoffman advises looking into the details for your specific state.

Avoiding the Gift Tax

All of the contributions from parents or grandparents made to a 529 savings plan are considered gifts to those recipients, Hoffman says. “The annual gift tax exclusion amount for 2019 and 2020 is $15,000. That means that you can contribute up to $15,000, per spouse, before you have to file a gift tax return,” Hoffman said. So, parents and grandparents, you can make a combined contribution of $30,000 annually to a 529 without having to worry about additional tax consequences. Any amounts contributed over the annual limit will be subject to gift tax and you will have to file a gift tax return for that year. But don’t fear, the vast majority of people won’t actually pay a tax on their gift because each individual is also allowed a lifetime gifting exclusion of $11,580,000 by the IRS, Hoffman explains.

ABLE Act

There are newer tax laws that can benefit parents of those with disabilities and help take some of the sting out of taxes and expenses associated with the disability. “The Achieving a Better Life Experience (ABLE) Act of 2014 allows states to create tax-advantaged savings programs for eligible people with disabilities (designated beneficiaries). Funds from these 529A ABLE accounts can help designated beneficiaries pay for qualified disability expenses,” explained Rob Wrubel, senior vice president with Cascade Investment Group. “ABLEs shield income and capital gains from tax while the money grows and, if the money comes out for Qualified Disability Expenses, the growth is tax-free. A big win.”

Also, with the ABLE Act, some of that money can be shifted to a tax-free vehicle, Wrubel says. This is huge. Now the transfer of funds from 529 plans to ABLEs is allowed and making this shift can free up money to use for disability expenses without paying tax and penalties on distributions, Wrubel says. “Not every state allows for the transfer of a 529 plan to an ABLE without a tax penalty, so make sure you check.” In addition, 24 states give residents either a tax credit or allow a deduction for contributions to an ABLE account. Again, check with your state plan and your tax preparer to see if this works for you, Wrubel advises.

American Opportunity Tax Credit (AOTC)

This is a tax credit you can qualify for if you are paying for qualified education expenses for higher education. “The credit itself is capped at $2,500, and 40% of whatever you claim could be refundable,” says Hoffman. “Refundable means that if your tax liability is $0 you can get money back from the IRS.” But because it is refundable, there are several qualifications you must meet to claim the credit. They include:

– Only the first four years of your dependent’s college education. – The student has to at least be enrolled half-time. The educational institution should send you a 1098-T that states the amount of qualified tuition that you’ve paid during the year. – Qualified expenses include tuition (as stated on the 1098-T), books, supplies, or equipment purchased for schooling. – Scholarships reduce the amount of qualified expenses that you’re allowed to claim.

In addition, the credit begins to phase out if your modified adjusted gross income (MAGI) is at least $80,000 ($160,000 for married filing joint), and you can’t claim the credit if your MAGI is more than $90,000 ($180,000 for married filing jointly). This means that you will begin to have a reduced benefit. If you file as married filing separately, you aren’t allowed to claim this credit at all, Hoffman explains.

Lifetime Learning Credit

According to Hoffman, the Lifetime Learning Credit (LLC) works the same as the AOTC with a few small differences as follows:

– The LLC can be claimed an unlimited number of times, as opposed to four times with AOTC. – The LLC has a smaller maximum limit of $2,000. – And the biggest difference is that the credit is not refundable. So that means the LLC is limited to $2,000 cap or your tax liability, whichever is smaller. If you have zero tax liability, then you will not get any benefit from the LLC. – The LLC also has a different MAGI phase-out range that begins at $58,000 for single filers ($116,000 for married filing joint) and caps at $68,000 ($136,000 for married filing joint).

Finally, when looking at the AOTC, LLC, and tuition and fees deductions, you can only claim one option per student each year, Hoffman says.

Student Loan Interest Deductions

The interest you pay on your dependent’s student loans is in fact deductible. It is capped at $2,500 per year. “If you paid over $600 in interest during the year you should receive a 1098-E from the institution that manages your loan,” Hoffman says. “Even if you don’t get a 1098-E (because the interest paid was less than $600), you can still claim any interest paid.” Be aware though, that there is an income phase-out of the deduction. If you make more than $70,000 filing as single ($140,000 for married filing jointly) the $2,500 cap will be reduced. And you won’t be able to claim any deduction if you make over $85,000 filing as single ($170,000 for married filing jointly), Hoffman says.

Head of Household Filing

Single parents, listen up. If you’ve covered over half the cost of keeping a home for you and a dependent child in the past year, then you have the ability to file as head of household instead of filing as single. This offers a higher tax deduction and benefits you, so if you can make this status, you should.

Medical and Dental Expenses

If you are a self-employed parent paying out of pocket for healthcare for you and your family, you may deduct 100% of the health insurance premiums for any children under the age of 27. Of course, some stipulations apply: You must not qualify for employee-paid health insurance, and the deductions cannot exceed what you actually make.

Earned Income Tax Credit

This credit is good for those making under $50,000 per year. “The taxpayer must have income less than $41,094 if claiming one child, $46,703 for two, and $50,162 for three,” Hoffman said. “Those amounts are only slightly increased for married filing joint. The great part of the EITC is that it’s refundable.” Grandparents, this applies to you, too, if you are raising the children. The EITC is available for grandparents that have grandchildren who live with them more than half the year, and the children are either younger than 19 or a full-time student and younger than 24, and they are a descendent of your son, daughter, adopted child, stepchild, foster child, brother, sister, half brother, half sister, or step-sister, Hoffman says.