Head of Household filing status is beneficial to taxpayers who qualify because the income brackets expand. For example, a taxpayer filing head of household can earn up to $50,800 and remain in the 15% tax bracket. One requirement: You MUST claim a dependent to file using the head of household status. If not, you’re required to use the single status, and will be taxed at 25%, as the threshold is $37,950.
To claim head of household, you must have at least one dependent and not be married. If you’re separated from your spouse, though not legally divorced yet, you may be considered unmarried by the rules of the IRS. You need to have lived separately from your spouse, in a different residence for at least the final six months of the year.
To be a qualifying dependent, the individual must be closely related to the taxpayer either through birth or marriage. Additionally, they must live with the taxpayers claiming HOH for over half of the year, and the taxpayer has to be responsible for paying a more than 50% of the household expenses.
Other filing statuses abide by different dependent qualifications. For example, under many filing statuses you can claim an elderly parent as a dependent, and they are not required to live in the same household. However, to claim a parent under head of household, the parent does need to live with you at least half the year, similar to other dependents in this status. You can claim a parent if you have another dependent who lives with you for the entire year. Head of household status is the only filing status that directly relates to how much you pay towards expenses to maintain your home.
Often, taxpayers qualify to claim the Earned Income Tax Credit (EITC), however they forget when they file their return. The IRS reports that one out of every five qualified taxpayers don’t claim the credit. Like all tax credits, the EITC decreases the amount of taxes you owe the IRS, and depending on the number of dependents and other circumstances, you may even be eligible for a refund! In some cases, the refund may be more than you paid in taxes, so don’t forget to claim the EITC when eligible. It’s a very important tax credit that can save you a ton of money. Who doesn’t love extra cash back?
Explaining the EITC
The EITC is a tax benefit for low-to-moderate income families that can reduce tax debt and sometimes fully eliminate any money owed. During the last tax season, approximately 26 million taxpayers claimed the EITC and were able to put over $63 billion back in their household income. On average, that’s $2,470 per tax return!
When you file this year’s tax return, don’t forget to check your eligibility to claim the EITC. If you determined that you forgot to claim the credit in previous tax years (up to three year prior) and you were eligible, the IRS may still provide you with a refund. Let them know as soon as possible, and remember to claim the EITC whenever you can!
Most taxpayers know that there are certain income limitations that they must fall under to claim the Earned Income Tax Credit (EITC), however income is not the only thing that can affect your eligibility. The other requirements one must meet in order to claim the EITC follow:
- You must have at least $1.00 in earned income, not including pensions and unemployment compensation, as these types of income do not qualify under the EITC rules for earned income.
- You hold less than $3,450 in investment income for the year.
- If married, you’ll have to file a joint return with your spouse to claim the EITC. Married, filing separate taxpayers are ineligible.
- You do not file Form 2555, Foreign Earned Income or Form 2555-EZ, Foreign Earned Income Exclusion.
Military members and clergy are subject to certain rules and exceptions. The same is true for those who have disabled dependents or who receive disability income themselves.
Another portion of the EITC relates to your number of qualifying dependents. For your children to qualify as a dependent for purposes of the EITC, they must meet these requirements:
- They must be related to you in one of the following ways: son, daughter, adopted child, stepchild, foster child, grandchild, brother, sister, half-sibling, step-sibling, niece or nephew.
- They must be under 19 years of age at the end of the tax year, and younger than you and your spouse (if married) OR under 24 if they are a full-time student for at least five months of the tax year. This requirement does not apply to children who are permanently and totally disabled.
- They must have lived with you in the U.S. for more than half of the year.
Prepare to provide the IRS with a valid Social Security number with the child’s exact name as printed on the card, and the full date of birth for each dependent.
This year, don’t forget to take advantage of tax credits and benefits that can save your family money. The following credits are important to taxpayers and their families:
Child Tax Credit: is worth up to $1,000 per child, depending on income. The higher your annual income, the smaller the credit. Married taxpayers who file jointly are subject to a credit reduction at over $110,000 of annual gross income.
Child and Dependent Care Credit: helps parents recoup some of the cost spent for supervision of their children while they work or search for work. The credit covers expenses up to $3,000 for services such as daycare for an individual dependent’s care, and a maximum of $6,000 for two or more dependents. Dependents who qualify for care in terms of this credit include children younger than age 13, a spouse or parent who cannot care for themselves, and other dependents who meet certain individual requirements. Depending on your income, the credit amount ranges between 20% and 35% of your expenses up to the $3,000 threshold ($6,000 for multiple dependents). Taxpayers with an AGI of $15,000 or less can receive the full 35% of the credit. Every $2,000 over the $15,000 in AGI will reduce the credit by one percent. Taxpayers with AGI of over $43,000 can claim 20% of their expenses through this credit. Note: if you pay with a flexible spending account or other tax advantaged program through your employer, the credit may be further reduced.
Earned Income Tax Credit: was designed to help put more money into the hands of low-income earners, relative to the size of their family. Based off your number of dependents, your income, and your filing status (married or single), this credit should be a serious consideration for families with an AGI that falls below $55,000. Be aware that investment income, along with other factors can affect your eligibility for this credit. You must have less than $3,500 in investment income, dividends, or capital gains to claim the EITC. Even if you don’t have any children or dependents, you may be qualified for up to $520 back if your income is less than $15,310 (single) or $21,000 (married, joint filers).
At tax time, students and those who have graduated may be eligible for special education tax credits that can significantly save them money.
American Opportunity Credit
Students who are enrolled in their first four years of college may claim this credit worth up to $2,500 in tuition, activity fees, books, equipment and supplies. The student must be enrolled at least half-time and must not have any felony drug convictions on their record. Parents of students can also claim the credit on behalf of their eligible child, if the same student is claimed as a dependent on their tax return. This credit phases out at higher incomes, maxing out at $90,000 in annual income for single filers, with double that ($180,000) for joint taxpayers.
Lifetime Learning Credit
Like the AOC, the Lifetime Learning Credit is used for tuition, fees, books, equipment and supplies, up to $2,000. However, this credit extends beyond the first four years of undergraduate education, allowing those taking graduate courses and classes that don’t lead to a degree to also be eligible to claim the credit. There aren’t any requirements for enrollment time, meaning you can be a full-time or part time student. You can only claim this credit once on your return, no matter how many eligible students you claim, and the credit maxes out at $2,000. Like the AOC, there are income phaseouts to be aware of: single filers- Modified adjusted gross income of $65,000; joint filers – $131,000 modified adjusted gross income.
Though both credits are excellent money savers for student sand their families, you are only able to claim one of the credits, so choose wisely. If you opt for the AOC, you can’t claim the Lifetime Learning Credit, and vice versa.
Once you’ve started repaying your student loans, you’ll understand how important it is to save money wherever possible. At tax time, you may be eligible to claim a deduction on interest you’ve paid on your student loan. Worth up to $2,500 off your taxable income, this deduction can really help students and graduates pinch pennies when possible. Taxpayers in the 15% bracket may receive a minimum of $375 in student loan interest deduction when they file their return.
Other Educational Deductions and Credits
As with any loan, you’ll generally pay back more than the amount you originally borrowed, due to interest. The student loan interest deduction is available to taxpayers with an AGI under $80,000 annually, and directly relates to how much you’ve paid in interest. Those who fall between $65,000 and $80,000 are subject to a reduced interest amount.
Parents may also deduct interest on loans they’ve taken to pay for their child’s education. Be aware though, if you took a loan in your name, and your parents claim you as a dependent, you sacrifice your claim to the deduction.
You don’t have to have already graduated to claim the deduction either, as students who have started making payments while in school are also eligible, if they are paying interest.
There are additional education deductions for students while they are in school. For example, students can claim up to $4,000 in tuition and fees or claim one of two education credits: The American Opportunity Tax Credit or the Lifetime Learning Credit. These are worth up to $2,500 and $2,000 respectively, each with their own requirements and rules.
After determining all your eligibility and income, you should claim the credit that will be the most beneficial to your taxes. Generally, credits offer the best benefit in comparison to deductions, as the latter reduces your taxable income. Credits decrease the amount you pay in taxes.
It’s common for many people to make a little mistake on their tax return. In doing so, it can delay your refund. However, if you make a mistake when claiming the Earned Income Tax Credit, you may wait months to receive that portion of your refund. Depending on the situation, some errors can lead to a denial of the full credit.
If this happens, you may face some penalties such as repayment of the credit amount you’ve received with interest. You may have to file Form 8862, “Information to Claim Earned Income Credit After Disallowance” before you can claim the EITC again on a tax return.
Should the IRS determine the mistake was reckless or intentional, you’ll be blocked from claiming the EITC again for two more years following. If it’s determined fraud was a factor in filing, you’ll be denied ability to claim the EITC for the next ten years.
Check your return carefully to ensure accurate filing.
Tax credits come in two varieties: refundable and non-refundable. The majority of tax credits fall under the latter, though there are some that can put more of your hard-earned money back into your bank account. At tax time, you need to know if the credit you are claiming is refundable or not, so you know exactly what to expect when you calculate your refund.
Like all tax credits, non-refundable ones still serve their purpose of reducing the amount of taxes due to the IRS. In some situations, tax credits can completely eliminate your tax debt. How non-refundable credits work:
You owe the IRS $1,500 in taxes but qualify to claim a $2,000 non-refundable tax credit. Your tax debt is reduced to zero, and the remaining $500 from the credit is eliminated. You won’t receive any money back, and the balance is non-transferable and can’t be carried over to another tax year.
Refundable tax credits are slightly different. If the tax credit in the previous situation was refundable, the $500 balance (after your tax debt was eliminated) would be awarded to you in a refund. These types of credits are two-fold: they can eliminate your tax debt fully and return some much-needed cash back to your hands!
Tax credits can really make a difference for your refund at tax time. Refundable tax credits are even better, as they can offer you money back even if your tax liability is reduced to zero. One of the most popular refundable tax credits you may be eligible to claim is the Earned Income Tax Credit.
The Earned Income Tax Credit was enacted in 1975 to replenish the pockets of low to moderate income families. As the name suggests, to be eligible for the credit, taxpayers must have earned income either through self-employment or as an employee of another. Additionally, you must have less than $3,450 in investment income to qualify to claim the credit. Other requirements include:
- Taxpayer must be between the ages of 25 and 65 years old.
- Taxpayer must have lived for a minimum of six months in the United States during the tax year.
- Taxpayer can’t be claimed by another as a dependent.
- Married taxpayers must file jointly.
The amount of the credit depends on your yearly income and the number of people you claim as dependents. The more dependents, the higher your credit will be; however, you can still claim the credit even without any children. You’ll need to fall under the income threshold as well. With the lowest amount of income and three or more dependents, the Earned Income Tax Credit can be worth up to $6,318.