You work hard for what you earn and need to be savvy about filing tax returns. Here are a few pointers on claiming what is rightfully yours from the IRS. You are doing the work of two people as a single parent and need a break. We have made a list of tips for tax breaks that you should consider. If it all sounds far too daunting and you are not sure exactly how to go about filing then you should engage a good tax practitioner. The amount you spend on the tax practitioner’s fee can result in thousands of dollars worth of tax credits and deductions. It is worth acting on advice if you are saving for something special, like a holiday to an exotic destination and need to make every dollar earned work for you.
1. File as head of household
Why? It will usually put you into a lower rate than if you file as single or filing separately but married. In order to do this you need to be unmarried on the last day of the tax year. You also need to contribute more than 50% of the financial support for the household. Kids must live with you for more than six months of the year.
2. Claim your qualifying dependents
Who can be a dependent? The IRS has a relationship test and if you can prove relationship you can claim, besides your own son or daughter, a stepchild, foster child, your own brother, sister, stepbrother or stepsister, or a descendent of one of these including a grandchild, niece or nephew. Legally adopted children are regarded as your own but as with all of the above the child will need to reside with you for more than 50% of the year. The child must also be a US Citizen, US National or US resident alien. So, for single mothers who are carrying perhaps the additional burden of caring for relatives who qualify as dependents this could save you a lot in taxes.
3. Claim the dependent exemption
When are you regarded as the child’s financial supporter? The child must not have provided more than 50% of the costs of support. So if you are looking after a child who has been given money to cover the majority of support you can’t claim the child as a dependent. According to the IRS the exemption amount is now $3950 for 2014 and you can claim one for yourself and one for each qualifying dependent. In 2014 if you earned over $254,200 for a single individual and $279,650 for a head of household, then you lose part of the benefit of this exemption. You also have to list the SSN (Social Security Number) for any dependent you claim. It is important that an ex-spouse does not try and also claim the exemption. This is where the person providing the most financial support must be clearly identified before filing a return.
4. Claim child tax credit
First off, a tax credit reduces the amount of income tax you have to pay while on the other hand a deduction reduces the amount of your income that is subject to tax, so generally you will pay less tax. To qualify for the Child tax credit, all children you claim as dependents must be under the age of 17 at the end of the year for which you are claiming. You could get as much as $1000 per qualifying child. This is however dependent on your income – it will be phased out once your income reaches over a certain threshold, currently that threshold is under $75 000. The IRS website states, “The amount at which this phase-out begins varies depending on your filing status. For married taxpayers filing a joint return, the phase-out begins at $110,000. For married taxpayers filing a separate return, it begins at $55,000. For all other taxpayers, the phase-out begins at $75,000. In addition, the Child Tax Credit is generally limited by the amount of the income tax you owe as well as any alternative minimum tax you owe.” So following Step 1 and claiming as Head of Household, gives you an edge.
Also if your income is low and the amount of your Child Tax Credit is more than the actual income tax you owe then you may be able to claim the Additional Child Tax Credit.
5. Claim childcare expenses
If you have to pay someone to look after the children under 12 while you are at work or then you can claim up to 35% of the expenses, up to a maximum of $3000 per child (Unfortunately over the age of 12 the IRS seems think they can look after themselves – or at least are not willing to consider claims for costs). The child carer you employ must be over nineteen ears of age and must be identified on your tax return, and also cannot be a parent of the child. If your employer excludes up to $5,000 for child-care from your taxable wages, (the maximum allowable) then you score the $5000 as against the $3000 tax credit. This is more beneficial if you have just one child but once you have two that’s a $6000 tax credit – so you have to deduct the $5000 from the $6000 and claim only the difference of $1000.
The Child Care Resource Center http://www.ccrcca.org – Child Care Resource Center has loads of information on care providers. They can also assist with information on finding reasonable childcare in your area, as currently childcare costs can amount to $18 000 per annum. For those who cannot afford childcare an application can be made to them to check if you qualify for assistance. They also have a library and toy resource center which parents who join can take advantage of. This means spending less of your hard-earned cash on toys which kids soon get tired of, instead borrowing them from the center. Which bring us to saving for education.
6. Claim education benefits
Certain states offer benefits for children from kindergarten to high school with regards to their stationery supplies and some may give benefits if your child is at a private primary or secondary school affiliated to a religious group.
By taking advantage of deductions, tax credits, and savings plans you can score some breaks with regard to higher education.
- Savings Plan. If you take out an education savings plan aim for one that allows the accumulated savings to grow tax-free until you take the money out to pay for tuition – then it is taxed or one that allows your savings to be entirely tax-free. According to the IRS, “An exclusion from income means that you won’t have to pay income tax on the benefit you’re receiving, but you also won’t be able to use that same tax-free benefit for a deduction or credit.”
- Credits. There are two available. You can link to the American Opportunity or Lifetime Learning credit pages on the IRS website American Opportunity Tax Credit and the Lifetime Learning Credit. American Opportunity is available on a per student basis while the Lifetime Learning credit is on a per household basis.
There are a number of rules, the main ones being that your dependent (listed on your tax return) or you are the eligible student; and that the person is enrolled at an eligible education institution. There are caps on income – so you qualify if you as a single filer earn less than $61 000. If you and your dependent qualify for both the American Opportunity and the Lifetime Learning credit you can only choose one per student per year.
- If you are single you can claim deductions on qualified educational expenses for yourself or your dependent. This can reduce your taxable income by up to $4000. You can claim for yourself or a dependent if you are eligible, registered at an eligible institution and pay the fees for yourself or your dependent. The cap for claiming these deductions is an income of $80 000 per year. The good thing is that books and stationery related to the course as well as student-activity fees can be claimed if they are paid over to the institution as one of the conditions of enrolment or attendance.
At least there are some breaks for single parents determined to give their children the best possible opportunities in life. Investing in your child’s future cannot be underestimated – who knows what your child could contribute to the world given the right guidance and education. And with educational deductions and credits available for parents too you could start studying towards that career you have dreamed of for so long. It is worth considering the new horizons open to you.