01Head of Household Filing Status
Qualifying as head of household requires that you have a dependent and it entitles you to a larger standard deduction than you would receive if you filed a single return: $18,000 rather than $12,000 as of 2018. So claiming that dependent just shaved $6,000 off your taxable income. You also get to earn more income before climbing into a higher tax bracket.
In addition to being able to claim a dependent who lives with you at least half the year in most cases, you must also be considered unmarried to file as head of household. “Considered unmarried” means that you’re either single or you haven’t lived with your spouse during the last six months of the year. You must also have paid more than half the expenses of maintaining your home during the tax year.
02The Child Tax Credit
Tax credits are better than tax deductions and the Child Tax Credit is one of the best available. Deductions only subtract from your taxable income. Credits are deducted from what you actually owe the IRS when you finish your tax return. Some credits are even refundable so the IRS will send you a check when and if the credit you qualify for exceeds your tax liability.
The Child Tax Credit is partially refundable but as the name suggests, you’ll need at least one child dependent to qualify for it. Not only was it not eliminated by the TCJA but it was increased from $1,000 per child in 2017 to $2,000 per child beginning in 2018.
If you have adult dependents, you can tack on additional $300 for each of them as well under the terms of the TCJA, at least for the next five years. And because it's partially refundable, you can receive up to $1,400 more in your tax refund if any of the credit is left over after erasing your tax debt.
This tax credit used to “phase out” or begin decreasing to zero for single taxpayers who earned more than $75,000 in 2017 or $110,000 for joint married filers. The TCJA increases these thresholds to $200,000 and $400,000 respectively so more people can qualify.
Your child dependent must be no older than 16 on the last day of the year and you must report earned income of at least $2,500 on Form 1040 or 1040A. You can’t file Form 1040EZ. Your child must have a valid Social Security number.
03The Child and Dependent Care Credit
The TCJA keeps the Child and Dependent Care Credit in place as well. This credit is equal to 20 to 35 percent of what you spend on child care so you can go to work or leave home to look for a job. The exact percentage depends on your income and how many child dependents you have who need care. It’s a portion of up to $3,000 in care costs if you have one child, or $6,000 if you have two or more children.
Your dependents must be under age 13—young enough to require supervisory care while you’re away from home—or disabled and incapable of self-care. If you’re married, your spouse must also be unavailable to care for your kids because he’s working or looking for work, is disabled, or is a full-time student.
If you pay an individual rather than a day camp or child care center, that person cannot be your spouse, the child’s parent, or another one of your dependents. You—and your spouse if you’re married and file a joint return—must have earned income to qualify.
You can’t claim this credit if you’re married but file a separate return, and you can only include costs not paid for or reimbursed by your employer. It’s not refundable.
04The Earned Income Tax Credit
You can claim the Earned Income Tax Credit even if you don’t have a child dependent, but it’s worth a lot more money if you do have dependents. This credit aims to put dollars back into the pockets of lower income families. It’s refundable.
You must have earned income to qualify…but not too much earned income. Unearned income from investments is capped at $3,500 for the year. Having adult dependents won’t qualify you for more of a credit. Your qualifying dependents must be children who are no older than age 19 at the end of the tax year or 24 if they’re still in school.
Here’s how it works out for the 2018 tax year. Let’s say you don’t have a child dependent. You’ll still qualify for the EITC if your income does not exceed $15,270 for the year and you’re not filing a joint married return. If you are filing a joint married return, you can earn up to $20,950 and still qualify. Your maximum credit without a dependent would be $519.
Now let’s look at the numbers if you have three qualifying child dependents. You can earn up to $49,194 if you’re single and up to $54,884 if you file a joint married return. Your maximum credit would be $6,431. So, yes, it’s definitely worth claiming your child dependents if you meet the income parameters, even if there are no more personal exemptions.
05Education Tax Credits
Two popular education tax credits survived the TCJA ax as well: the Lifetime Learning Credit and the American Opportunity Credit. You can claim either one of them—both not both—for yourself if you qualify, and you can also claim them for your spouse or your dependents.
If more than one of you is pursuing postsecondary education, you can claim one credit for one student and the other for another. You just can’t use the same student expenses to claim both.
The student must be in the first four years of college to qualify for the American Opportunity Credit, but the Lifetime Learning Credit doesn’t share this restriction. The maximum AOC is $2,500 per student while the maximum LLC is capped at $2,000 per student. It’s equal to 20 percent of the first $10,000 you pay in tuition and fees annually.
06Tax Deductions for Your Dependents
Your dependents will also help qualify you for various tax deductions. The student loan interest deduction is worth up to $2,500 in interest you paid on qualified student loans over the course of the year for yourself, your spouse, or your dependents.
And you don’t have to itemize and forego 2018's increased standard deduction to claim this one. It’s an above-the-line deduction on the first page of Form 1040. The earliest versions of the TCJA initially eliminated this deduction, but it was saved in final negotiations so it’s still available.
The tuition and fees deduction for post-secondary education costs for yourself and your dependents expired at the end of 2016. The TCJA did not revive it, but it’s still alive and well thanks to the Bipartisan Budget Act of 2018. The BBA extended it for one more year through 2017. It’s status is still up in the air for 2018, so stand by. This tends to be one of those 11th-hour saves from year to year.
Your dependents’ expenses can also contribute to the medical expense deduction if you decide to itemize on your return. You can claim a deduction for the portion of your overall expenses that exceed 7.5 percent as of the 2018 tax year. The TCJA reduces this threshold from 10 percent, but only through 2018. It goes back up to 10 percent in the 2019 tax year.
No More Personal Exemptions? You Can Still Claim These Tax Credits
Several tax credits escaped 2018 tax reform but you need dependents to qualify
CPAs and the Internal Revenue Service—not to mention Joe Taxpayer—are all still reeling a little from the significant changes that took effect in January 2018 under the Tax Cuts and Jobs Act. One of the biggest changes under the new tax law is the elimination of personal exemptions.
The exemption was $4,050 in the 2017 tax year. You could cut $4,050 off your taxable income for yourself, as well as $4,050 for your spouse and for each of your dependents. Do the math. A married couple with three children could deduct $20,250—$4,050 times five–paying tax on that much less income. It was a pretty good deal.
Of course, there were limitations. Taxpayers who earned too much were prohibited from claiming personal exemptions, but a majority of taxpayers could do so and they could feel the loss now that personal exemptions are gone.
So is it even worth claiming dependents at all anymore? It can be, because several other tax perks depend on having them.