How Can Claiming Dependents Help Lower Your Taxes?
Being a parent or primary provider for someone is a big responsibility. The time and energy spent caring for another human is a big commitment, and it can be incredibly costly to pay for another person’s living expenses. That’s why the IRS offers special tax benefits for those that have dependents.
Parents are often eligible for the child tax credit. While still obligated to go through the process of reporting income and filing taxes, the tax credit allows parents to reduce the amount they owe. The resulting reduction ensures that they can instead invest that money into raising their family. Fortunately, this isn’t the only tax benefit that you can unlock by claiming your dependents when filling out your tax forms.
Who Qualifies as a Dependent?
To get started, it’s important to understand who qualifies as a dependent under the IRS definition of the term. Generally speaking, a dependent is a person who has the cost of their care provided by someone else. In other words, a dependent is someone who “depends” on you to provide for their basic needs, like food and housing.
While this primarily applies to children, there may be other relatives that fall under this category. That is why the IRS has created an interactive tax assistant where taxpayers can answer a series of questions to determine whether someone would qualify as a dependent. The tool allows you to add multiple people for verification, so you can easily assess the status of your entire household with a few simple clicks.
Why Should You Claim Dependents?
One of the main advantages of claiming dependents is qualifying for tax credits. Tax credits reduce your tax liability and, in some cases, can even reduce your liability to zero. For those with child dependents, some of the most common forms of tax credits available include:
- Child Tax Credit. The Child Tax Credit includes a credit of up to $2,000 per child dependent. Additional restrictions may apply.
- Additional Child Tax Credit. This credit allows a refund of up to $1,400 per child dependent, determined by your tax liability after the application of the child tax credit. Additional restrictions may apply.
- Earned Income Credit. As a tax credit for low-income households, the EIC grants higher amounts to families with child dependents. Additional restrictions may apply.
- Child and Dependent Care Credit. Also available to those with non-child dependents, the child and dependent care credit includes a tax credit of up to $3,000 per dependent with an upper limit of $6,000. Additional restrictions may apply.
Those with non-child dependents may be eligible for the Other Dependent Credit, which is a tax credit of up to $500 per non-child dependent.
Tax credits can be extremely helpful in reducing your tax liability and certain tax deductions may modify your taxable income. Deductions related to dependent care include but are not limited to deductions for medical and dental expenses and deductions for the interest on a student loan.
Get Help With Claiming Dependents
Determining which credits and deductions you qualify for can make a huge difference in your tax liability. However, the process can be a little overwhelming. For assistance in determining whether or not you may be able to reduce your tax liability, contact Western Shamrock today.