We have now had a full year with The Tax Cuts and Jobs Act, which enacted many significant changes for taxpayers. For families, especially those with children, it’s important to know how these laws may impact your financial planning.
As a working woman and a mother of two, I was pleased to learn that some of the new tax law changes will be helpful in planning expenses and future savings for my children. To help you think strategically about your tax planning, we have outlined some of these changes. Talk to your advisor about how these changes may affect your taxes.
Child Tax Credit. For 2018, the maximum child tax credit was increased to $2,000 per qualifying child, double the previous amount. Your dependents must be under the age of 17 at the end of the year for you to claim the credit. A tax credit helps to directly reduce your taxes, while a deduction reduces the amount of income you pay taxes on. Up to $1,400 of this credit can be refundable, meaning it can help to reduce your tax bill.
At the same time, the income threshold where the Child Tax Credit begins to phase-out has been increased to $400,000 for married couples filing jointly (which is up from $110,000 in 2017). The higher income limits will allow more families to claim this credit, with a significant number of them claiming it for the first time for 2018.
Credit for Other Dependents. This credit is new and allows taxpayers to take $500 for each qualifying dependent. Qualifying dependents include children over the age of 17 (including college students), and parents or other relatives in the household whom you support. This credit is nonrefundable and the income threshold phase-out is the same as for the Child Tax Credit ($400,000 for joint filers). Unlike the Child Tax Credit, qualified dependents do not need to have valid Social Security Numbers for taxpayers to claim this credit.
Child and Dependent Care Tax Credit. This is a tax break specifically for working parents. According to the IRS, if you paid someone to care for a child or dependent in order for you to be able to work, you may be eligible to reduce your federal income tax by claiming this credit.
The maximum amount of eligible expenses you can claim is limited to $3,000 for one child or dependent, and $6,000 for two or more dependents. Qualifying dependents include children age 12 or younger, and other adult dependents who may not be able to care for themselves, and who lived with you for at least half the year.
While there were no changes to the amounts for this tax credit, at the start of this new year, it may be a good time to think about and calculate how much your total care expenses will be for the year. For example, does your employer provide a way for you to pay for child care with “pre-tax” dollars? Can you take advantage of a flexible spending account to cover these costs? Talk to your advisor about how these scenarios may impact your tax planning.
Historically, distributions from a 529 educational savings plan were not subject to tax if the funds were used to pay for qualified tuition for higher education (college) only. The new tax law now lets people withdraw up to $10,000 from their 529 plans (per beneficiary each year) for certain non-college educational expenses (elementary or secondary public, private or religious school of the beneficiary’s choosing). As long as the $10,000 is used to cover expenses for elementary through high school education, these withdrawals are not considered taxable income for federal tax purposes, which can help alleviate the costs of public or private schooling. For example, this may give grandparents who have a historical tie with specific religious or private schools the opportunity to contribute to the 529 plan for their grandchildren.
It’s important to note that not all states have gone along with this change. Every state’s plan is different, so it’s critical that you review the state laws where your 529 plans are invested. New York, for instance, will tax any withdrawals used for non-college expenses. We recommend that you discuss educational expenses with your advisor and tax professional to avoid any unintended state-level taxation.
Do you need more tax advice? Our Insights page has several tax-related resources which you can use.
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