In a number of situations, a family might have only one income. One parent might stay home to raise the children, or a single parent might be raising children alone due to divorce or widowhood. In a one-income family, it can be tough to make ends meet. When you consider the tax problems that could arise, it can be even more challenging. To make things a bit easier this tax season, get ahead of potential tax problems and stop them before they start.
Here are the biggest tax questions about tax breaks for single-income families so you can keep your tax burden as low as possible.
1. Can We Claim the Child and Dependent Care Credit?
When one spouse does not have income, you cannot claim the child and dependent care credit. This credit offsets child care expenses so that both parents can work or look for work. If one parent stays at home to care for the children, you cannot claim this credit. If you are a single parent with custody of your children, you can claim this credit if you have income.
To claim this credit, you must understand who qualifies as a dependent. In the words of the Internal Revenue Service, a qualifying individual for this credit is your dependent qualifying child who is under age 13 when the care is provided.
2. Can We Claim the Child Tax Credit?
Not many one-income family tax credits are available, but this is one that applies to all families with children. You can claim the child tax credit, which reduces your federal income tax by $1,000 for each qualifying child under age 17. This is an important credit because, unlike a deduction, which reduces the amount of income you are taxed on, a tax credit reduces the amount of tax you have to pay. For example, if you owe $4,000 in income tax and you have two children, you can apply this credit of $1,000 per child to reduce the amount of tax you owe to $2,000.
The child tax credit begins to phase out at $110,000 in modified adjusted gross income for married couples filing jointly.
You can also claim the dependency exemption, which for 2017 is $4,050, for each child who is a qualifying dependent. The dependency exemption is an itemized deduction that is phased out at higher income levels. There is no difference in this exemption for single-income versus dual-income taxes.
3. Can We Use a Dependent Care FSA?
With a dependent care flexible spending account, or FSA, you can make pre-tax contributions, which lowers your taxable income. You can use the money to pay for qualified child care expenses. Unfortunately for the single-earner family, this money can only be used if the care was provided so that you could work. If one parent stays at home, you cannot take advantage of a dependent care FSA.
4. Can a Non-Income Earning Spouse Still Save for Retirement?
In most cases, you must have earned income in order to contribute to a traditional or Roth IRA. Many single-income families assume that the breadwinner is the only spouse who can contribute to one of these retirement accounts because the non-working spouse doesn’t have any earned income, according to Thomas Walsh, an Atlanta-based certified financial planner with Palisades Hudson Financial Group. The IRS makes an exception in this case, however.
“In order to promote retirement savings from both spouses in the home, the IRS created the spousal IRA,” Walsh said. A working spouse can contribute up to $5,500 a year — or $6,500 if you are over 50 — to an account for the benefit of the non-working spouse. You have until the April tax-filing deadline to make a contribution for the previous year, and you can deduct the contribution from your taxable income on your federal tax return if you meet certain requirements.
5. How Can We Get the IRA Contribution Deduction?
If only one spouse has income, that income must be enough to support the deduction of your IRA contribution. That means that the combined contribution you make to your IRAs must not be more than the working spouse’s taxable income. The limit on contributions is $5,500 — $6,500 if you’re over 50 — so as long as the working spouse’s taxable income is at least $11,000 if you want to contribute the maximum amount to two IRAs.
6. Can We Get the Saver’s Credit?
Low- to moderate-income taxpayers can take advantage of the saver’s credit, a tax credit for contributing to a retirement account, such as a 401k or IRA. The credit is worth up to $4,000 for married couples filing jointly.
To qualify, married couples filing jointly need an AGI of less than $63,000 to get a credit for 10 percent of their retirement contribution. To qualify for the maximum credit of 50 percent of your contribution, your joint AGI cannot be more than $38,000. If you file as head of household, you qualify for the maximum credit with an AGI of less than $28,500 and a partial credit if your AGI is less than $47,250. For other filing statuses, including single, married filing separate and qualifying widow, you’ll get the full credit with an AGI under $19,000 and a partial credit with AGI up to $31,500.
IRA vs. 401k: Tips for Choosing the Best Retirement Plan
7. What’s the Best Way to File Our Tax Return?
For most married couples, a status of married filing jointly will result in the lowest tax payment. Even if only one spouse works, you want to file jointly. Filing separately allows you fewer deductions, and you cannot file as head of household if you are married. Consulting with a tax professional can help you choose the best filing status for your unique financial situation.
8. Shouldn’t We Use Married Filing Separately?
Filing separately while you’re still married can create problems at tax time, according to David Du Val, chief customer advocacy officer at TaxAudit, a tax audit defense firm. If you use the married-filing-separately status, you’ll miss out on valuable tax breaks such as the earned income credit for low-income taxpayers, education credits for college expenses and the student loan interest deduction, Du Val said.
“Ninety-five percent of the time, you will get a bigger refund or owe less if you file jointly,” Du Val said. So if you’re separated or living apart, you still might want to file a joint return to get the tax benefits. Or you might qualify for head of household if your spouse didn’t live with you for the last six months of the year, you paid more than half the cost of keeping your home and your dependents lived with you for most of the year.
9. How Are Alimony and Child Support Taxed?
If you’re divorced and get financial help from your ex-spouse, you need to be careful about the type of support you receive because it will make a difference at tax time. Alimony is treated as taxable income, but child support is not, said Lloyd M. Grissinger, the Memphis, Tenn.-based managing director of CBIZ MHM, an accounting and tax service.
“That’s why it’s important to have proper representation on the legal side,” he said. Make sure during the divorce settlement that you agree to have money come to you as child support — or get a large enough alimony payment to cover the tax bill that will come with it, Grissinger said.
On the flip side, people who pay alimony get to deduct that payment on their tax return. However, they can’t deduct child support payments. Child support is essentially tax-exempt.
10. Who Claims the Children as Dependents If We Co-Parent?
Claiming dependents can be tricky if you’re divorced. Typically, you can treat a child as a qualifying dependent if that child lives with you more than half the year. You’re entitled to claim exemptions — which reduce your taxable income — for dependents. Plus, you qualify for other tax deductions and credits as the custodial parent.
However, if your child lived the same number of nights with you and your ex-spouse, you can’t both claim the child as a dependent and this might become a point of contention. If your spouse earned more than you, he will be treated as the custodial parent and allowed to claim the child as a dependent, according to the IRS.
11. Can We Take the Earned-Income Tax Credit?
The earned-income tax credit can help lower the tax burden on low-income families. Families with one earner might fall into this category.
In order to qualify for the earned-income tax credit, your AGI cannot exceed a certain level. The level is based on your filing status and the number of qualifying children you have. If you are married filing jointly and you have two children, your AGI must be less than $50,597 to qualify. In addition, your investment income cannot be more than $3,450 for the year.
The earned-income tax credit is a refundable tax credit, so you could get money back even if you have no tax due.
12. Can I Get the Earned-Income Tax Credit If My Only Income Is Alimony?
To qualify for the earned-income tax credit, you must actually have earned income. So, if alimony or child support was your only income, you can’t qualify for the credit. Social Security and unemployment benefits also don’t count as earned income.
You can also be disqualified for the credit if you receive investment income that exceeds a certain amount. For 2017 returns, the amount is $3,450.
13. Does Everyone Need to Have Health Insurance?
Under the Affordable Care Act, sometimes called Obamacare, everyone must have minimum essential health coverage or be subject to a penalty that is assessed when you file your taxes. If everyone in your family is covered by a healthcare plan through the breadwinner’s employer, or if you purchase health coverage for all family members, you’re fine. But if you omitted one or more family members from your health insurance policy to save money, you might end up paying for it at tax time.
14. What Filing Status Should I Use If I Am Widowed?
If you become a widow, you need to make sure you don’t file using the wrong tax status. Otherwise, you could miss out on some tax breaks.
If your spouse dies during the year and you’re a single-income household at tax time, you can still use the married filing jointly status for the year in which your spouse died. That way, you can take advantage of the higher standard deduction for married couples and joint tax rates.
15. Can I Deduct Student Loan Interest After the Divorce?
Some of the tax benefits you got as a single-income household while you were married might disappear when you get divorced. For example, you can deduct up to $2,500 in student loan interest as long as your modified adjusted gross income is under $160,000 if you’re married filing jointly. Note that the deduction phases out beginning at a MAGI of $130,000.
If you are filing as single or head of household, however, the deduction starts to phase out at $65,000 and is eliminated completely for those with MAGI of $85,000 or more.
16. Are We Eligible for a Healthcare Subsidy?
Taxpayers whose income is 100 percent to 400 percent of the poverty level might qualify for the premium tax credit if they buy their health coverage through their state’s Affordable Care Act exchange, according to Grissinger.
Taxpayers run into problems with this credit because it’s figured at the beginning of the year based on the previous year’s income. If your income ends up being higher than the previous year’s income on which the credit is based, you could have to repay some of the credit you received when you filed your tax return, Grissinger said. Or if you and your spouse separate and use a married filing separately status, you typically can’t qualify for the credit.
Unfortunately, you likely won’t be aware that you have to pay back some or all of the credit until you complete your tax return. “This new wrinkle has caused a lot of people to have much smaller refund,” Grissinger said.
Filing income taxes can be particularly challenging for single-income families, but these single-income family tax tips can make filing easier and could help you avoid overpaying Uncle Sam.
Karen Doyle contributed to the reporting for this article.