How Much Does a Dependent Reduce Your Taxes?

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How Much Does a Dependent Reduce Your Taxes?

Is it possible to claim a dependant on your tax return? If this is the case, various federal tax advantages, such as the earned income tax credit (EITC) and child tax credit (CTC), may assist reduce your tax burden or possibly raise your refund. Here’s a brief rundown of who qualifies as a dependant and how declaring one affects your tax return.

Key Takeaways

  • For income tax purposes, a dependant may be either a qualifying kid or a qualifying relative, such as a brother or parent.
  • A person may only be a dependant of one taxpayer each tax year.
  • For the 2021 tax year, the American Rescue Plan doubled the child tax credit and made it completely refundable, which means you might receive a refund even if you don’t owe any taxes.
  • For the 2021 tax year, the earned income tax credit (EITC) is a refundable tax credit of up to $3,618 for one dependant, $5,980 for two dependents, and $6,728 for three or more dependents.

What Is a Qualified Dependent?

A dependant is someone who receives at least half of their financial assistance from you throughout the year, such as for home expenditures, medical care, education, clothes, and so on. If you have a dependent, you may be eligible for a number of tax breaks that might save you money at tax time.

A person may only be a dependant of one taxpayer during a tax year. To qualify as a dependant, the individual must:

  • Be a US citizen, a US national, a resident alien, or a Canadian or Mexican resident.
  • Possess a current taxpayer identification number (TIN), such as a Social Security number.
  • You did not submit a combined tax return for the year.
  • Not claiming a personal exemption (if one is available for the tax year) or claiming someone else as a dependant

The personal exemption was repealed by a provision in the Tax Cuts and Jobs Act, and it stays zero for tax years 2021 and 2022, as it was in 2020.

Types of Dependents

Despite the fact that all dependents must fulfill the broad conditions outlined above, you cannot claim someone as a dependant unless they are your qualifying child or qualifying relative. To establish who qualifies, the IRS employs several “tests.”

What Are the Tests for a Qualifying Child?

A child must merely be a child in order to be deemed an eligible child. To be your qualified kid, a person must meet five criteria, according to the IRS:

  1. Relationship evaluation. To pass this test, the individual must be your biological or adopted kid or stepchild, foster child, sibling or stepsibling, or a descendant of any of these.
  2. Age assessment. The individual must be (a) under the age of 19 at the conclusion of the tax year, (b) under the age of 24 if a full-time student and younger than you, or (c) any age if permanently and completely incapacitated.
  3. Test of residency The individual must live in your primary home for more than half of the tax year. Exceptions apply in cases such as brief absences (for example, due to sickness, schooling, or vacation) or the birth or death of a child within the year.
  4. Test for support. The individual must offer less than 50% of their own support for the whole year.
  5. Return together. The individual is not required to submit a joint return for the year (unless they file only to claim a refund of income tax withheld or estimated tax paid).

What Are the Tests for a Qualifying Relative?

Similarly, a qualified relative is more than just someone to whom you are connected. To be a qualified relative, the individual must instead meet four criteria:

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  1. There is no qualifying kid test. This individual cannot be your eligible kid or the qualifying child of another taxpayer.
  2. Test for household members or relationships. As a household member, the individual must reside with you throughout the year. Otherwise, they must be related to you as your child, stepchild, foster child, or a descendant of any of them; your sibling, including half-siblings and stepsiblings; your parent, stepparent, grandparent, or another direct ancestor (but not a foster parent); or your daughter-in-law, son-in-law, mother-in-law, father-in-law, sister-in-law, or brother-in-law.
  3. The gross income test The person’s gross annual income must be less than $4,300 ($4,400 in 2022). If the individual is incapacitated and receives money through a sheltered workshop, there is an exemption.
  4. Test for support. You must contribute more than half of the person’s entire annual assistance.

Children of Divorced or Separated Parents

In the event of divorced or legally separated parents, a child is normally the dependant of the custodial parent—the person with whom the kid spent the most of the year. If both parents worked for the same amount of time during the tax year, the parent with the larger adjusted gross income (AGI) may file the claim.

The Child Tax Credit was modified by the American Rescue Plan Act of 2021. (CTC).The child tax credit is completely refundable for the 2021 tax year and rises to $3,000 for children aged 6 to 17 and $3,600 for those under 6. The credit phase-out begins at $75,000 for solo filers, $112,500 for heads of household, and $150,000 for married couples filing jointly.

Tax Benefits of Having a Dependent

A tax credit decreases your tax liability on a dollar-for-dollar basis. A tax deduction, on the other hand, reduces your taxable income, resulting in a lesser tax bill. Tax credits are more advantageous than deductions since they might save you more money. If you have a dependent, you may claim a number of tax credits and deductions.

Here is a list of the most frequent tax credits and deductions:

Child Tax Credit (CTC)

The child tax credit (CTC) is a tax break that taxpayers get for each eligible dependent child. The American Rescue Plan boosted the child tax credit for 2021 from $2,000 to:

  • At the end of 2021, children aged five and younger will pay $3,600.
  • $3,000 by the end of 2021 for youngsters aged six to seventeen.

For the 2021 tax year, the $500 nonrefundable credit for additional dependents stays unchanged.

If your adjusted AGI exceeds: the child tax credit is eventually decreased to $2,000 per kid.

  • $150,000 if married filing jointly or a qualifying widow or widower.
  • $112,500 if you file as the head of the household
  • $75,000 whether you file as a single person or married filing separately.

If your adjusted AGI exceeds $400,000 if married filing jointly, or $200,000 for all other filing statuses, the credit might be lowered to less than $2,000 per kid.

For the 2022 tax year, the child tax credit will return to $2,000 per kid. In addition, although the credit is completely refundable for the 2021 tax year, it returns to being partly refundable in 2022.

Earned Income Tax Credit

The earned income tax credit (EITC) is a refundable tax credit that assists low-income taxpayers in reducing their tax liability on a dollar-for-dollar basis. Though the credit is accessible to all taxpayers, individuals with dependents will get a larger credit. The EITC AGI restrictions and maximum credit amounts for 2021 are as follows:

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EITC for 2021
DependentsSingle or Head of HouseholdMarried Filing JointlyMaximum EITC
$21,430$27,380$1,502
1$42,158$48,108$3,618
2$47,915$53,865$5,980
3+$51,464$57,414$6,728

Child and Dependent Tax Credit

Individuals and couples who pay for the care of a qualified child or handicapped dependant while working or seeking for employment are eligible for the child and dependent care credit. When computing the credit, you may include up to $8,000 in eligible costs if you have one qualified dependent, or up to $16,000 if you have two or more dependents.

The proportion of those costs that may be claimed as a credit is determined by your income (and that of your spouse if you file a joint return). For 2021, the maximum percentage is 50%, which is accessible to all qualifying taxpayers with an AGI of $125,000 or less. The credit is finally lowered to zero as your AGI rises. If your AGI is $438,000 or greater, you will not be eligible for the credit.

The child and dependent care credit is worth up to $4,000 for one dependant and up to $8,000 for two or more dependents in 2021.

Student Loan Interest Deduction

The student loan interest deduction enables you to deduct up to $2,500 of student loan interest paid throughout the tax year. For example, if you are in the 12% tax rate and claim the whole amount, your tax for the year would be reduced by $300 ($2,500 12%). Your deduction is limited to the amount you paid in student loan interest if you paid less than $2,500.

The student loan must be taken out for yourself, your spouse, or a qualified child or family. If your modified AGI (MAGI) is between $70,000 and $85,000 and you file as single, head of household, or a qualified widow or widower in 2021 or 2022, the deduction progressively fades out. If you file a combined return, the deduction fades down between $140,000 and $170,000 in 2021 before increasing to $145,000 to $175,000 in 2022. If your MAGI exceeds the limit, you cannot claim the deduction.

American Opportunity Tax Credit

The American Opportunity Tax Credit (AOTC) assists students in defraying the costs of their first four years of higher education. The credit provides a maximum yearly tax credit of $2,500 for approved education costs per eligible student. If the credit reduces your tax liability to zero, you may be eligible for a refund of up to 40% of the leftover credit (up to $1,000).

Room and board, medical expenses, and insurance—or any qualified expenses paid for with 529 plan funds—don’t count as qualified education expenses.

Either the student or someone who claims the student as a dependent can take the AOTC on their income tax return. For 2021, your MAGI must be $80,000 or less ($160,000 if filing jointly) to claim the full credit. The credit begins to phase out if your MAGI is between:

  • Single filers may earn between $80,000 and $90,000
  • $160,000 for single taxpayers and $180,000 for joint filers

You can’t claim the credit if your MAGI is above those thresholds.

Medical and Dental Expenses Deduction

You may be able to deduct certain out-of-pocket expenses you paid for medical and dental care for yourself, your spouse, and your dependents (i.e., a qualifying child or a qualifying relative) (i.e., a qualifying child or a qualifying relative).As far as the IRS is concerned, medical expenses are the costs of “diagnosis, cure, mitigation, treatment, or prevention of disease.”

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Starting in 2021, the deduction applies only to expenses that exceed 7.5% of your income. So, if your AGI is $50,000, you can claim the deduction for medical expenses that exceed $3,750 ($50,000 × 7.5%).

Head of Household Status

In addition to the numerous tax credits and deductions, you may qualify for head of household status if you have a dependent. Taxpayers who file as heads of household have a higher standard deduction and a lower marginal tax rate than single filers—both of which can lower your taxes. For example, the standard deduction for the 2021 tax year for single filers is $12,550, while it’s $18,800 for heads of households.

To file as head of household, all of the following statements must be true:

  • On the final day of the year, you were unmarried.
  • You spent more than half of the annual expense of maintaining your house.
  • A eligible individual resided in your house for more than half the year (except for temporary absences).If the qualified individual is your parent, they do not have to reside with you.

Can I Claim the Child Tax Credit, EITC, and the Child and Dependent Care Credit?

Yes. As long as you meet the qualifications for each credit, you can claim all three on your income tax return.

Who Qualifies for the Child and Dependent Care Credit?

You can claim the child and dependent care credit if you paid a person or an organization to care for your dependent under the age of 13 (e.g., your child) or a dependent of any age or your spouse who can’t care for themselves and lives with you for at least half of the year.

What Is the Deadline for Filing My 2021 Tax Return?

The deadline for filing your 2021 tax return is Monday, April 18, 2022. Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, may be used to get an automatic six-month extension.

What Is the Difference Between a Tax Credit and a Tax Deduction?

A tax credit decreases the amount of tax you owe immediately, but a tax deduction reduces your taxable income (the amount of income on which you owe taxes).Tax credits are more advantageous since they reduce your tax liability. A $1,000 tax credit, for example, reduces your tax burden by $1,000. A $1,000 tax deduction, on the other hand, decreases your taxable income by $1,000. If you are in the 22% tax rate, the $1,000 deduction will save you $220 ($1,000 22%).

The Bottom Line

If you can claim a dependent on your tax return, you may be eligible for a variety of tax credits and deductions that might help reduce your tax payment or raise your refund. If you claim all of the tax benefits to which you are eligible, you may save thousands of dollars at tax time. If you need assistance evaluating your eligibility or submitting your return, contact a tax expert.

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