What Parents & Caregivers Need To Know About Filing Taxes in 2023
Whether you are a new parent or have recently taken on caregiver duties for a child, it’s important to know which tax credits you may be eligible to receive during tax season. As you file your 2022 income tax returns, keep the following common tax planning opportunities in consideration.
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This is what parents and caregivers should know about filing taxes in 2023.
Child Tax Credit
According to the IRS, taxpayers may claim the child tax credit for each qualifying child with a Social Security Number (SSN) valid for U.S. employment. Dependents must meet the following requirements as a qualifying child in the 2022 tax year:
- Be under age 17 at the end of the year (2022)
- Be the taxpayer’s son, daughter, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, half-brother, half-sister or a descendent such as a niece, nephew or grandchild
- Be a U.S. citizen, U.S. national or U.S. resident alien
- Be claimed as a dependent on your tax return
- Lived with the taxpayer for more than half the year
- Provides no more than half of their own financial support during the year
For tax year 2022, the child tax credit is worth as much as $2,000 per child with the refundable maximum of $1,500. Jesse Little, senior director of advice at Wells Fargo Wealth & Investment Management, said the refundable maximum is $1,600 for tax year 2023.
“If a person’s tax bill is $0 and they have earned income of at least $2,500, they can claim the refundable part of the credit,” said Little.
Parents and caregivers filing their taxes will also need to pay attention to what happens to the child tax credit at higher adjusted gross income levels. Little said this credit starts to decrease in value at an AGI of $200,000 for single filers and at $400,000 for married filing jointly filers.
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Child and Dependent Care Credit
If a taxpayer has paid expenses for the care of a qualifying individual while they work or are actively looking for work, they may be able to claim the child and dependent care credit.
Who qualifies for the child and dependent care credit? These individuals may include a dependent child who was under age 13 when the care was provided or a dependent who was physically or mentally incapable of self-care and lived with the taxpayer for more than half of the year. If a taxpayer paid someone to provide care to a child under age 19 or who they claim as a dependent, they are ineligible for the credit.
As stated by the IRS, taxpayers may not calculate more than $3,000 for one qualifying individual or $6,000 for two or more qualifying individuals. Little said the percentage of qualified expenses a taxpayer can claim ranges from 20% to 35%.
Earned Income Tax Credit (EITC)
Low- to moderate-income workers and their families may be eligible to claim the Earned Income Tax Credit (EITC). Those who qualify may see their credit amount change depending on their income, the number of children they have and their filing status.
“The dollar amount of the credit ranges from $560 to $6,935 for the 2022 tax year and from $600 to $7,430 in 2023,” said Little.
For taxpayers to qualify for the EITC for the 2022 tax year, Little said a taxpayer must have the following:
- At least $1 of earned income from employment or self-employment
- Less than $10,300 of investment income for the tax year
- No foreign income for which the taxpayer claims the foreign earned income exclusion
- A valid SSN
- U.S. citizenship or resident alien status
- A filing status other than married filing separately (unless the taxpayer meets new requirements for married but separated spouses)
- A qualifying child who meets the age, relationship, residency and joint return requirements
Additionally, Little said the taxpayer’s AGI must be below the income thresholds provided by the IRS.
Adoption Tax Credit
Taxpayers who adopted a child may be eligible for the adoption tax credit.
“A taxpayer can claim up to $14,890 as an adoption tax credit if their adjusted gross income is less than $223,410,” said Little. “For adjusted gross income between $223,410 and $263,410, the taxpayer would receive a lower adoption tax credit. For adjusted gross income in excess of $263,410, the adoption tax credit is unavailable.”
Qualified adoption expenses for the adoption tax credit include reasonable and necessary adoption fees, court costs and attorney fees and travel, meal and lodging expenses while away from home. Little said if the child being adopted has special needs, the taxpayer can claim the maximum allowable adoption tax credit.
Higher Education Tax Credits
While parents of college-aged children typically don’t get to claim their children for a child tax credit, parents who pay for higher education may be eligible for the following tax credits.
American Opportunity Tax Credit (AOTC)
The AOTC is a credit for qualified education expenses. It is paid to an eligible student for the first four years of higher education with a maximum annual credit of $2,500 per eligible student.
According to the IRS, if the credit brings the amount of tax the taxpayer owes to zero, they may have 40% of the remaining amount of the credit refunded to them. To claim the full credit, Little said a taxpayer’s adjusted gross income must be $80,000 or less. For those married filing jointly, it must be $160,000 or less.
Lifetime Learning Credit (LLC)
The lifetime learning credit (LLC) helps eligible students enrolled in an eligible educational institution pay for undergraduate, graduate and professional degree courses. The LLC is worth up to $2,000 per tax return and there is no limit on the number of years you can claim the credit.
There are, however, income limits for LLC. For tax year 2022, the IRS said the amount of your LLC is reduced if your MAGI is between $80,000 and $90,000 as a single filer. For those filing a joint return, this amount is between $160,000 and $180,000. If your MAGI is $90,000 or more as a single filer, or $108,000 or more for those filing a joint return, you cannot claim the LLC.
Student Loan Interest Deduction
Are you helping your child pay off a student loan? Eligible taxpayers may be able to deduct the lesser of $2,500 or the amount of interest paid during the year on their tax returns.
Little said taxpayers may not claim the deduction for a child who takes out a student loan in their own name. This is true even of student loans where the parent makes the payments but is not the loan’s obligor.
“Only the child can take the deduction, and then only if the parent does not claim them as a dependent,” said Little.
Health Insurance Deduction for Self-Employed Parents
Little said self-employed parents who pay for health insurance for their children can deduct premiums paid for children under age 27. Eligible health insurance expenses include dental, long-term care and medical premiums.
“A taxpayer will not qualify for this deduction if their spouse is entitled to employer-sponsored insurance covering the children.”
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