If you're like most moms, taxes aren't your favorite activity, but it's something we all have to do. Even though you won't file your 2017 taxes for another year, planning for them now can help you save money in the long run. Here are some simple tips to help you get the most out of the tax code this year.
How to Make the Tax Code Work for You in 2017
Use exemptions to your advantage.
Whether you are single or married, you can knock $4,050 off your taxable income for every dependent you claim with personal exemptions. Dependents are usually qualifying children or qualifying relatives, so any kids who live at home and you provide over half support for should earn you an exemption.
If you are separated or divorced, claiming exemptions can be more complicated. Typically, the custodial parent gets to claim all of the exemptions for the kids unless he or she decides to give the exemption to the other parent. The custodial parent can give this exemption away for just one year, or it can be released for more than one year. However, because it's hard to guess what taxes may look like in the future, most custodial parents make this choice on an annual basis.
Keep in mind that high-income earners may not qualify for the whole exemption amount. Once your income reaches a certain threshold, this exemption will gradually decrease.
Lower your bill with the child tax credit.
Exemptions aren't the only benefit of having dependents. If you meet certain requirements, your kids will also earn you a tax credit of $1,000 each. This is usually a nonrefundable credit, which means that it will only work to lower your bill. If your balance is smaller than the credit, the rest of the credit is lost. However, part of this credit can be refundable for some lower income moms.
If you're divorced or separated, you can claim this credit only if you are also claiming the exemption for the child. If the child's other parent is claiming the exemptions, he or she gets to take the child tax credit, too.
Cash in with the earned income credit.
If you earn income below a certain threshold, you can qualify for the earned income credit. Like the child tax credit, this credit lowers your tax bill dollar-for-dollar. However, unlike the child tax credit, the earned income credit is refundable, which means you get to keep it even if it's bigger than your balance.
The amount of your earned income credit will depend on how much you made, your filing status, and the number of qualifying children you are claiming. The maximum credit for 2017 is $6,318.
Start an IRA.
Every year, the IRS lets you contribute a certain amount of for IRA contributions. For 2017, the limit is $5,500 ($6,500 if you are at least 50).
In general, you have to earn income in order to take advantage of this deduction. However, even moms who don't work outside the home can pay into an IRA in some cases.
If you are married and you file jointly with your spouse, you can pay into a traditional or Roth IRA based on your spouse's earnings. The maximum amount you can contribute depends on how much your spouse earns and whether he or she pays into an employer-sponsored retirement plan.
You may also be able to pay into an IRA if you receive alimony. In this case, your alimony will be treated as earned income.
File as head of household.
Did you know that the tax code has a special filing status for people running a home on their own? If you are a separated or unmarried mom, you may be able to use the head of household filing status instead of the single status. This means that you'll have a lower tax rate and a higher standard deduction, both of which translate to lower tax bills.
To qualify as a head of household for tax purposes, you need to be a mom with dependent children who is unmarried or living apart from her spouse during the last six months of the year. You also need to be paying more than half the household bills on your own.
Use childcare to cut your bill.
If you're a working mom with kids under 13, you can lower your tax bill with childcare expenses. The IRS offers a nonrefundable tax credit to moms who pay for childcare in order to work or look for work.
This credit is calculated as 20 to 35 percent of your qualifying childcare expenses. The percentage used to calculate the credit depends on your adjusted gross income, and the expenses you can include are limited to $3,000 for one child and $6,000 for more than one child. The amount of expenses you claim for this credit can't be more than the amount you earned during the year. If you and your spouse both worked, your claimed expenses can't be more than the income of the spouse with lower earnings.
Keep in mind that any childcare benefits your employer pays must be excluded from your calculations. This includes reimbursements. If you do receive these benefits, they may still be tax deductible, but you can't use them to claim this credit.
Plan for your child's future.
Planning for your child's future education is always a good idea, but it can earn you a tax break too. Under the current tax code, you can use two different plans to save for the future and get a tax benefit: the Coverdell Education Savings Account and the Qualified Tuition Plan.
With a Coverdell account, you can contribute a maximum of $2,000 per year to the account. Contributions aren't deductible, but all of the money the account earns is tax-free, as long as you use it to pay for qualified education expenses. Coverdell contributions will phase-out for higher income taxpayers beginning at an AGI of $190,000 for married taxpayers filing jointly and half that amount for other taxpayers.
With a Qualified Tuition Plan, which may also be called a Sec 529 Plan, you can contribute large sums of money each year. The money earned by these accounts grows tax-deferred and is tax-free, as long as it is used to pay for college tuition and related expenses.
Anyone can contribute to these plans, but the most common contributors are parents and grandparents.
Claim an education credit.
Paying to put a child through college is expensive, so why not use it to lower your tax bill? If you have at least one child in college, you may qualify for the American Opportunity Tax Credit (AOTC). With this credit, you can claim 100 percent of the first $2000 paid toward tuition and related expenses, as well as 25 percent of the next $2,000 paid for each child who was enrolled at least half-time. Better yet, 40% of the credit is refundable. This credit is good for the first four years of post-secondary education.
Moms with kids in college may also qualify for the Lifetime Learning Credit (LLC). This credit is non-refundable, but you can claim 20 percent of up to $10,000 in tuition and related expenses paid for all children in your family. The maximum credit is $2,000. Unlike the AOTC, this credit is not limited to the first four years of study.
Here's the best part: Even if you aren't the one paying these expenses, you may still get to claim an education credit. As long as you are claiming an exemption for the child, you can use expenses paid by someone else to qualify for one of these credits.
Write off student loan interest.
Paying interest is a part of life, but it rarely saves you money on your taxes. Luckily, student loan interest is an exception. The IRS will let you deduct up to $2,500 per year for the interest you pay on student loans, as long as the loans were used to pay for your education, your spouse's education or the education of someone who was your dependent at the time. This deduction is available whether or not you itemize.
To qualify for this deduction, the loan must have been taken out solely for higher education expenses, and the student must have been enrolled at least half-time. If the lender is related to you, you won't qualify for a deduction.
This deduction phases out for single filers whose AGI is over $65,000 and joint filers with an AGI over $130,000. If you are married but file separately, you can't deduct student loan interest.
Maximize your medical expenses.
If you itemize your deductions and you pay enough medical expenses during the year, you can deduct some of them. When you total your medical expenses for the year, don't forget to include breast pumps and other lactation supplies. You can also include all unreimbursed medical expenses you pay for your children. You can usually deduct these expenses even if your child's other parent is claiming the child as dependent for tax purposes.
Taxes can be complex. Leaving deductions on the table, or worse, making a mistake, can bring costly consequences. Find a local tax preparer who has your best interests at heart.
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