When tax season rolls around, everyone’s goal is to minimize the amount they need to pay. Saving money is especially important for families, who have numerous expenses in the present while also trying to put money away for the future.
Fortunately, there are several ways for taxpayers with families to reduce their tax burden. In this article, we share our advice on how you can maximize your family tax savings.
Tip #1: Claim All Possible Child-Related Tax Deductions & Credits
There are multiple tax deductions and credits that apply to children. Claim as many as you can. They include:
- Child & dependent care credit – For 2021, you may be eligible to take a credit on expenses spent on daycare which enabled you to go to work, look for work or attend school. This credit is calculated based on your income and the expenses you paid. The maximum amount you can claim in 2021 for this credit is $4,000 for one dependent and $8,000 for two or more dependents.
- Child tax credit – For 2021, the amount of the child tax credit was increased. Each qualifying household is eligible to receive up to $3,600 for each child under 6 and $3,000 for each child between the ages of 6 and 17. If your household did not opt out of the advanced child tax credit that started in July of 2021, you would have received a partial advance on the amounts above. Your tax preparer will need to know these amounts to accurately calculate the correct credit amount on your 2021 tax return.
- American opportunity tax credit and Lifetime learning credit – If you, your spouse or a dependent are paying for higher education and meet certain qualifications, these tax credits may be available to you. Many taxpayers believe once their children turn 18, they cannot be considered dependents on their parent’s tax returns. This is incorrect. If your child has graduated high school and decided to go to college, you may be eligible for a credit.
Tip #2: Deduct Medical & Dental Expenses
Having a family means lots of trips to the doctor and dentist. Any expenses paid out of pocket for you, your spouse or dependents are tax-deductible provided they exceed 7.5% of your adjusted gross income (AGI) for the tax year 2021.
Tip #3: Contribute to Your Retirement & Health Savings Accounts
If you meet certain qualifications, a portion of your retirement savings contributions can be deducted from your taxes. To maximize savings if you do have a retirement plan through an employer (pre-tax 401(K) plan is an example), take the maximum amount allowed out of your income if possible.
If you have a high deductible health insurance plan, contributions to a health savings account (HSA) are fully deductible and tax-free, provided they are used for qualified medical expenses. In 2021, the allowable deductions are $3,600 for individuals and $7,200 for families. If you are age 55 or older, you can contribute an additional catch-up contribution of $1,000 per year until the year in which you turn 65 and apply for Medicare.
Tip #4: Make Energy-Efficient Home Improvements
If you make energy-efficient improvements to your principal home, you could claim a residential energy credit. This credit applies if you invest in:
- Energy-efficient windows & doors
- Energy-efficient heating and air conditioning systems
- Water heaters
- Biomass stoves
- Qualifying solar applications
Tip #5: Donate to Charities
A common way to get a tax deduction is to donate to a qualified charitable organization that has been granted tax-exempt status by the IRS. For 2021, the contribution limit for a deduction is 100% of your adjusted gross income. For 2021, if you do not itemize, you can deduct $300 for individual taxpayers and $600 for married taxpayers.
Tip #6: Work with a Tax Professional
There are many ways to maximize your family tax savings. This article detailed just a few of them. To ensure you claim all credits and tax deductions for which you’re eligible, consult with a tax expert. They can provide guidance to help you keep as much money in your pockets as possible.
At Kilday, Baxter & Associates, we offer individual tax preparation and individual tax planning services. We are available year-round to help you and answer your questions. Contact us to speak with one of our experts or schedule an appointment.