Here Are All the Tax Changes That Impact Parents
Every year, the IRS makes changes that could affect you and your tax bill. If you’re a parent, there are certain changes that went into effect for the current tax year that you need to be aware of before filing, including changes to who qualifies for specific tax credits and how much they are for.
Read on for a comprehensive overview of all the tax changes that parents need to know about in 2023.
The Child Tax Credit and the Child and Dependent Care Credit Have Been Reduced
Many credits have changed for this tax year, which will lead to smaller tax refunds than usual, and there are two in particular that could affect parents.
“Parents specifically will be impacted by the Child Tax Credit (CTC), which has been reduced from $3,600 and $3,000 to $2,000 in 2022, or lower depending on your income,” said Jody Padar, CPA, head of tax strategy and evangelism at april.
This reduction can really make a big difference in your tax bill.
“The difference of $1,600 can add up quickly as it is per child, [so if you have] three children, [that’s a] $4,800 difference,” said Eric Bronnenkant, CFP, CPA, head of tax at Betterment.
The second tax credit to be aware of is the child and dependent care credit.
“Individuals with children will also be affected by the Child and Dependent Care Credit (CDCC), which was reduced from $4,000 for one child and $8,000 for two to $1,050 and $2,100, respectively,” Padar said.
The income levels for receiving the maximum child and dependent care credit have also been reduced.
“For taxpayers earning up to $125,000 in 2021, the maximum credit was substantially more generous and potentially refundable,” said Eli Aviv, founder of AVIVTAX Inc. “For 2022, only those earning $15,000 or less can qualify for the maximum credit. It’s also no longer refundable.”
You Need To Be Earning Income To Qualify for the CTC or CDCC
High-income earners may no longer qualify for these credits, and those without income won’t qualify either — a change from previous years.
“If you didn’t earn any income this year, you’re not going to be eligible for any of these credits,” Padar said. “Since a lot of people were without jobs during the pandemic, Congress made concessions to people who lost their jobs or were unable to find work. Now that unemployment is at a relatively low level, earning some form of income is a requirement to receive the CTC, CDCC or Earned Income Credit.”
No Advance Child Tax Credit Payments
Under the American Rescue Plan of 2021, advance payments of up to half the child tax credit were available to eligible taxpayers, but this is no longer the case.
“You can’t receive a portion of the credit in advance, as was the case last year,” said Ferencz Kaszoni, founder of Income Tax. “All in all, almost everything is going back to the way it was before COVID. Those bigger tax credits are all going away. This means parents are going to get smaller refunds or in some cases, they may even owe money this year when they haven’t in the past couple of years.”
You May Qualify For the American Opportunity Tax Credit
Although this change dates back to 2009, you may not be aware of the upgrade from the Hope Scholarship Credit to the more generous American Opportunity Tax Credit, which applies to qualified education expenses you pay for a dependent child.
“The American Opportunity Tax Credit covers up to $2,500 per student,” said Tom Wheelwright, CPA, CEO of WealthAbility. “The amount phases down, starting at incomes over $80,000 for single filers and $160,000 for married taxpayers filing jointly.”
More From GOBankingRates
- Side Gig: Earn Up To $200/Hour With This Easy-To-Start Job, No College Degree Required
- How To Get Free Money: 13 Proven Ways
- 3 Things You Must Do When Your Savings Reach $50,000
- 5 Ways To Elevate Your Finances Daily
Gabrielle Olya contributed to the reporting for this article.
