No More Personal Exemptions? You Can Still Claim These Tax Credits
These tax credits escaped 2018 tax reform but you need dependents to qualify
Some significant tax changes took effect in January 2018 under the Tax Cuts and Jobs Act (TCJA). One of the biggest changes under the new tax law was the suspension of personal exemptions through 2025.
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 might 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 breaks depend on having them.
Head of Household Filing Status
Qualifying as head of household entitles you to a larger standard deduction than you would receive if you filed a single return: $18,350 rather than $12,200 for single filers as of tax year 2019, going up to $18,650 and $12,400, respectively, in the 2020 tax year. And it requires that you have at least one dependent.
Claiming one can shave $6,150 off your 2019 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, you must be "considered unmarried" to file as head of household—you’re either single or you did not 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
Tax credits are better than tax deductions, and the Child Tax Credit is one of the best available. Deductions subtract from your taxable income, but credits are deducted from what you actually owe the IRS. 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.
But you’ll need at least one child dependent to qualify for this one—as the name suggests. Not only was this credit not eliminated by the TCJA, but it increased from $1,000 per child to $2,000 per child beginning in 2018.
This tax credit used to “phase out” or begin decreasing to zero in 2017 for single taxpayers who earned more than $75,000, or $110,000 for joint married filers. 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 (Dec. 31), and you must have earned income of at least $2,500 to qualify. Your child must have a valid Social Security number. 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.
As of 2018, you can also claim a tax credit for dependents who are older than age 16. The TCJA provides for a Family Tax Credit now as well. It's only worth $500, but that's better than nothing. Most of the qualifying rules are the same as for the Child Tax Credit, except adult dependents don't have to have valid Social Security numbers. Your dependent will need an Adoption Taxpayer Identification Number (ATIN), however, or an Individual Taxpayer Identification Number (ITIN).
Unfortunately, this credit is not refundable, so the most it can do is shave $500 off your tax bill for each qualifying dependent. It also masquerades as the "Credit for Other Dependents."
The Child and Dependent Care Credit
The TCJA kept the Child and Dependent Care Credit in place as well. This credit equals up to 35% 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 a refundable credit.
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 income. Unearned income from investments is capped at $3,600 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 age 24 if they’re still in school.
Here’s how it works out for the 2019 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 $15,570 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 $21,370 and still qualify. Your maximum credit without a dependent would be $529.
These limits are indexed yearly for inflation.
Now let’s look at the numbers if you have three qualifying child dependents. You can earn up to $50,162 if you’re single, and up to $55,952 if you file a joint married return. Your maximum credit would be $6,557.
So, yes, it’s definitely worth claiming your child dependents if you meet the income parameters for this tax credit, even if there are no more personal exemptions.
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—for yourself if you qualify, and you can also claim one of them for your spouse or each of your dependents.
In other words, you can claim one credit for one student and the other for another if more than one of you is pursuing postsecondary 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 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.
You don’t have to itemize your deductions to claim this one. It’s an above-the-line adjustment to income. The earliest versions of the TCJA initially eliminated this deduction, but it was saved in final negotiations so it’s still available.
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 2019 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.
Your Dependents Can Still Save You Tax Dollars
Tax breaks available to taxpayers who can claim dependents aren’t limited to this list. The Adoption Credit remains in place, as do several other tax deductions. In most cases, the qualifying rules for dependents remain the same as they were before the TCJA.