And no matter what the year or the law is, you always want to make sure you’re managing your tax situation in the most cost-effective way possible.
“At the end of the day, tax mitigation is really about putting more money into your pocket as a consumer,” says Deborah Meyer, financial planner, certified public accountant and owner of financial planning firm WorthyNest in Saint Charles, Missouri. “You want to make sure you’re starting the process early, gathering all the documents you need and taking full advantage of every deduction that you’re eligible for to build your wealth and grow your asset base.”
Especially when you’re filing for a family – and already worrying about stretching your budget to cover costs for multiple people – you want to be sure to take advantage of every tax break available to you. The trick is figuring out which breaks apply to your situation and which ones come with the maximum benefit. First, you have to figure out exactly what your situation is, which can be more complex than you might think.
“There’s not always a choice, of course, but you generally want to choose the most favorable option for you,” says financial planner and CPA Jeffrey Levine, director of financial planning at wealth management firm BluePrint Wealth Alliance in Garden City, New York.
For example, should you file as single or head of household? If you have qualifying dependents, you can file as the latter and take advantage of lower tax rates and a higher standard deduction. For 2017, the standard deduction if you’re filing as single is $6,300. If you’re head of household, it’s $9,300.
If you’re married, should you file jointly or separately?
“Typically the joint filing is going to be best, but there’s always circumstances that are unusual,” Levine says.
For example, if you and your spouse earn similar incomes, filing jointly might push you into a higher tax bracket. That might work out if you factor in certain deductions and breaks that are available to you if you file taxes jointly, but you should weigh your options.
Keep in mind, too, that your marital status at the end of the year is what counts for Uncle Sam. So, if you got married on Dec. 31, 2017, the Internal Revenue Service considers you married for all of 2017. And if you got divorced on New Year’s Eve, it applies to your whole year’s taxes, too.
Next, you have to think about who might count as a dependent. If you have little ones relying on you to keep them fed, clothed and clean, the answer is obvious. But whether you claim children who are college-aged or older or other household members, such as your elderly parents, as dependents might require more thought.
“Clarifying exactly how many dependents you can claim in your household is an important piece,” Meyer says. But people often get tripped up when making that calculation. “It’s actually not based on age. It’s based more on the support test, like how much support you’re providing to the other family member and also looking at where they’re living throughout the year. So just reviewing those dependency rules, you might be able to get some additional tax benefits from that.”
It’s particularly important to get this right this year because it’s your last shot to do so. A major change for the 2018 filing year is that you’ll no longer be able to claim personal exemptions for each member of the household. In 2017, the personal exemption was $4,050 per person. So, a married couple with three young children could claim personal exemptions of $20,250. In 2018, that will no longer be an option, but some of that loss will be offset by the higher standard deduction and child tax credits.
This year, deciding which breaks you might consider taking depends on what stage of life your family is in. If you have kids younger than 17, you can claim a credit of up to $1,000 per child “just by purely having a child,” says Kerri Swope, vice president of Care.com Homepay, which assists families with their caregiving payroll, tax and human resources matters. (For 2018, the child tax credit doubles to $2,000 per kid.)
This credit starts to phase out for joint filers with adjustable gross incomes of more than $110,000 and single and head-of-household filers with incomes of more than $75,000. But the good news is: As a credit, it reduces your tax bill dollar-for-dollar, unlike a deduction, which only reduces your taxable income. So even if you only qualify for $500 of this credit, that’s still a full $500 worth of savings.
Parents of young kids (age 12 and younger) who use child care services – and adult children who cover care costs for their aging parents – can also take advantage of the child and dependent care credit. It lets you get back 20 to 35 percent (based on your income) of $3,000 worth of care costs for one child or $6,000 for multiple kids. You and your spouse have to work or be in school to qualify for this credit.
If you used a dependent care flexible spending account offered by your employer to cover care costs with pretax dollars, you can still use the child and dependent care credit – just not for the same dollars. For example, if you have two kids and spent more than the $5,000 maximum allowed through your FSA to pay for child care for the year (an easy bar to cross given the high cost of child care), you can still claim the credit for $1,000 of additional expenses.
“Every dollar counts when it comes to saving money for child care,” says Swope.
Source: US News & World Report