No More Personal Exemptions? You Can Still Claim These Tax Credits
Dependent Tax Credits to Claim in Place of Personal Exemptions
Some significant tax changes took effect in January 2018 under the Tax Cuts and Jobs Act (TCJA). One of the biggest changes under the law was the suspension of personal exemptions through 2025, when the TCJA potentially expires. It used to be that you could claim one for yourself, one for your spouse, and one for each of your dependents every year to whittle down your taxable income.
So, is it even worth claiming dependents at all anymore? It can be, because several other tax breaks still depend on having them, and they represent some serious tax savings, too.
What Are Personal Exemptions?
The personal exemption was $4,050 in the 2017 tax year before the TCJA took effect. 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. A married couple with three children could subtract $20,250—$4,050 times five—from their taxable income before claiming the standard deduction for their filing status or itemizing.
That $4,050 per person tax break is lost, at least through the end of the 2025 tax year, but claiming dependents can still save you tax dollars. The TCJA also more or less doubled standard deductions over what they were in 2017, so your tax situation might remain at least somewhat similar if you’re eligible to claim these other tax breaks.
Head-of-Household Filing Status
Qualifying as head of household entitles you to a larger standard deduction than you would receive if you were to file a single return: $18,800 rather than the $12,550 that single filers can claim as of tax year 2021, up from $18,650 and $12,400, respectively, in the 2020 tax year.
Claiming this filing status requires that you have at least one dependent. Claiming one can shave $6,250 off your 2021 taxable income—the difference between the single and head-of-household standard deductions. You also get to earn more income before climbing into the next highest tax bracket.
In addition to being able to claim a dependent, you must be "considered unmarried" to file as head of household. This means you’re single or you didn’t live with your spouse at any time 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.
The Child Tax Credit and the Credit for Other Dependents
Tax credits are better than tax deductions, and the Child Tax Credit is one of the best available. Tax deductions can only subtract from your taxable income, but credits are deducted from what you actually owe the IRS. A few credits are even refundable, so the IRS will send you a check when and if the credit you qualify for exceeds your tax liability. But you’ll need at least one child dependent to qualify for this one.
The Child Tax Credit
Not only was the Child Tax Credit not eliminated by the TCJA, but it increased from $1,000 per child to $2,000 per child beginning in 2018. The credit used to “phase out,” or begin decreasing to zero, for single taxpayers who earned more than $75,000, or $110,000 for joint married filers in 2017, but the TCJA increased these thresholds to $200,000 and $400,000, respectively, so more people can qualify.
Your child dependent can be no older than 16 on the last day of the tax year (December 31), and you must have earned income of at least $2,500 to qualify. The Child Tax Credit is partially refundable, so 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.
The American Rescue Plan Act of 2021 increased the Child Tax Credit to $3,600 for children under age 6, and to $3,000 for children from age 6 through age 17, for tax year 2021. But the phaseout thresholds decrease to $75,000 for single filers, $112,500 for those who qualify as head of household, and $150,000 for married taxpayers filing jointly. It's fully refundable, however. This special rule expires on January 1, 2022.
The Credit for Other Dependents
As of tax year 2020, you can also claim a tax credit for dependents who are older than age 16. This one is only worth $500, but that's better than nothing. Most of the qualifying rules are the same as for the Child Tax Credit. Your dependent must have an Adoption Taxpayer Identification Number (ATIN) or an Individual Taxpayer Identification Number (ITIN) if they don't have a Social Security number.
Unfortunately, the Credit for Other Dependents isn’t refundable, so the most it can do is shave $500 off your tax bill for each qualifying dependent.
The Child and Dependent Care Credit
The TCJA kept the Child and Dependent Care Credit in place as well. This credit normally equals up to 35% of what you spend on care for your dependents so you can go to work or leave home to look for a job. The exact percentage depends on your income and how many dependents you have who need care. It’s a portion of up to $3,000 in care costs if you have one dependent, or $6,000 if you have two or more dependents who need care.
The American Rescue Plan Act relaxes these rules for tax year 2021 as well. You can claim 50% of your expenses of up to $8,000 for one qualifying dependent, and up to $16,000 for two or more qualifying dependents. The credit is refundable for this tax year only as well.
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 they're working or looking for work, disabled, or a full-time student.
If you pay an individual rather than a day camp or 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 generally can’t claim this credit if you’re married but file a separate return, but some exceptions apply if you don’t live with your spouse. You can only include costs not paid for, or reimbursed by, your employer. It’s not normally a refundable credit except in tax year 2021.
The 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 one or more. 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. Unearned income from investments is capped at $10,000 beginning in the 2021 tax year, the return you’ll file in 2022. This is an increase provided for by the American Rescue Plan Act of 2021, signed into law in March 2021, and it's permanent.
Having adult dependents won’t qualify you for a credit. Your qualifying dependents must be children who are no older than age 19 at the end of the tax year, or age 24 if they’re still in school.
You’ll still qualify for the EITC if you don’t have a qualifying child, if your income doesn’t exceed $15,820 in tax year 2020, and you’re not filing a joint married return, but you can earn up to $21,710 if you’re filing a joint married return.
Your maximum credit without a dependent would be $538 in 2020, increasing to about $1,500 in 2021 for one year only, under the terms of the American Rescue Plan Act.
Education 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—but not both—if you qualify for yourself, for your spouse, and one for each of your dependents.
You can claim one credit for one student, and the other for another, if more than one of you is pursuing post-secondary education. You just can’t use the same student's 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, and up to 40% of that is refundable, while the maximum LLC is capped at $2,000 per student. It’s equal to 20% of the first $10,000 you pay in tuition and fees annually.
Your dependents will also help qualify you for an education-related tax deduction. 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.
You don’t have to itemize your deductions to claim this one. It’s an above-the-line adjustment to income.
The Medical Expense Deduction
Your dependents’ expenses can also contribute to the medical expense deduction if you decide to itemize on your tax return. You can claim a deduction for the portion of your overall expenses, including many health insurance premiums, that exceed 7.5% of your adjusted gross income (AGI) as of the 2020 tax year.
The TCJA reduced this threshold from 10%, but only originally through 2018. Congress later extended the 7.5% rate through 2019 in the Tax Extender and Disaster Relief Act of 2019, then through 2020 in the Further Consolidated Appropriations Act. It’s slated to increase again to 10% of AGI in tax year 2021.