10 Family-Friendly Tax Deduction Ideas

Everyone knows that one of the prime benefits of having a family is reaping those delightful tax benefits. Sure, children also fill your heart with joy and purportedly enhance your character, but when April rolls around, affection doesn’t pay the bills.

So, how can you maximize your savings with your offspring? One option is to opt for the standard deduction if you anticipate not being able to itemize enough deductions. (Keep in mind that when itemizing, deductions only kick in after surpassing 2 percent of your Adjusted Gross Income.) However, we’ll provide advice for families who do itemize and take deductions, ensuring that everyone can secure the largest slice of the pie possible.

Rarely does a parent need reminding during tax season to include their children. With each child bringing in a valuable $3,950 exemption, it’s unlikely that a parent will overlook little Kevin nestled in the attic when it’s time to fill out those tax forms.

However, it’s crucial to note that the scope of eligible children extends beyond just biological or adopted ones. Stepchildren, foster children, siblings of your own children, or even their descendants can all qualify as “qualifying children.” These qualifying children must reside with you for at least half of the year, be under 19 years old (or 24 if they are a full-time student), and be unable to provide more than half of their own support.

The beauty of claiming a child exemption isn’t solely about reducing your tax bill; it also directly lowers your entire adjusted gross income (AGI). This adjustment could potentially place you in a lower tax bracket overall.

Remember, it’s not just children who may rely on you for support. It’s crucial to claim exemptions for any dependents who depend on you as well.

However, don’t assume you can claim just anyone as a dependent. You can’t simply list your lazy brother if you’re only tossing him $50 each month and letting him crash at your place occasionally. But if you have a relative, like your cousin Larry, who earns less than $3,900 annually and relies on you for at least half of his support, you’re entitled to claim an additional $3,950 deduction for him. Whether the person lives with you or not doesn’t matter; even Grandma, living independently but relying on your financial assistance for rent, can meet the criteria.

You can also claim a non-relative as a dependent if they live with you full-time and meet all other qualifications. Many dependents might qualify because they depend on you to cover what we’ll delve into next: medical expenses.

If you’re opting for itemized deductions rather than the standard amount, remember that you can deduct medical expenses exceeding 10 percent of your AGI. This can be a significant advantage for families, allowing them to write off various medical bills and related costs for all household members.

A wide range of medical expenses qualifies for deduction. Any expenses incurred for the prevention, diagnosis, or treatment of a medical condition are eligible. However, cosmetic procedures like a nose job aren’t deductible unless medically necessary. Costs for transportation to receive medical treatment, as well as prescription medications, are also deductible. Additionally, you can include your employer-based insurance premiums if they exceed the 10 percent threshold.

For self-employed individuals, the deduction for medical premiums is available regardless of whether you itemize deductions or take the standard deduction. You can claim this deduction on Form 1040 without the need for itemization.

While deducting education expenses isn’t straightforward, there’s still a glimmer of hope, especially for college-related costs. If any family members are attending college, you can claim a deduction without itemizing. This deduction lowers your AGI, potentially placing you in a lower tax bracket. You can claim up to $4,000 per year for tuition or enrollment fees for higher education programs. Additionally, the American Opportunity Credit provides a $2,500 tax credit for each of the four years of college, subject to income limitations. The Lifetime Learning Credit, which isn’t restricted to four years, offers a $2,000 credit per return.

However, beyond college, the government isn’t as generous with deductions for education expenses.

If you’re aiming to maximize your deductions while itemizing, the key is to accumulate as many eligible expenses as possible to reduce your tax bill beyond the standard deduction threshold. Remember, your deductions must exceed 2 percent of your AGI before they become effective, so the more you gather, the greater the benefit. Charitable contributions present an excellent opportunity to bolster your deductions gradually.

Certainly, it’s essential to maintain records of any contributions made to nonprofits or charitable causes throughout the year. Yet, cash donations aren’t the only deductible items. If your recent garage sale didn’t yield the expected results and resulted in numerous trips to Goodwill, you can deduct the fair market value of the donated items. Even transportation costs incurred while attending charitable events, such as traveling across the county to participate in environmental cleanup efforts, are deductible, so be sure to track your mileage.

For families facing tax challenges due to periods of unemployment, deducting moving expenses could offer significant relief. Whether relocating for new job prospects or pursuing long-held career aspirations, eligible expenses related to the move can be claimed.

The advantage extends to all household members, not just the individual securing employment. This means expenses such as lodging and transportation for the entire family during the move can potentially be deducted (excluding meal expenses).

However, to qualify for the deduction, you must satisfy both a time and distance criterion. The time test stipulates having 39 weeks of employment within the year following the move, preventing short-term job stints solely for tax benefits. Additionally, the distance test requires the new residence to be at least 50 miles farther from your old work location than your former residence. If your new job necessitates childcare arrangements, keep reading to discover potential child care tax savings.

Working parents can find significant financial relief through the Child and Dependent Care Tax Credit, a valuable resource for families who enlist assistance in caring for their children.

It’s crucial to note that the credit applies specifically when childcare is necessary for work-related purposes, such as while you’re actively working or seeking employment. The credit itself is substantial, covering up to 35 percent of childcare expenses, with a maximum cap of $3,000 for one child or $6,000 for multiple dependents, depending on your income.

Importantly, this credit isn’t limited to your own children but extends to other dependents and even spouses requiring care due to physical or mental disabilities. So, if a family member needs care during your working hours, you may still be eligible to claim the credit.

The Earned Income Tax Credit (EITC) is a valuable credit designed to provide financial support to lower-income individuals. What makes it particularly advantageous is its refundable nature, ensuring that even those who haven’t had taxes withheld can receive a refund.

The amount of the EITC credit varies based on factors such as income, marital status, and the number of qualifying children. While there’s no age limit for the credit if you have a qualifying child, you must be between 25 and 65 without one.

Regardless of job loss or reduced working hours during the year, you may still qualify for the credit if your income falls below a certain threshold. For single filers with no children, this limit is $14,590 annually. The threshold increases for joint filers with qualifying children, with the highest AGI qualifying for the EITC being $52,427 for those filing jointly with three or more qualifying children.

Many Americans, over 20 million in fact, fail to claim home office deductions despite having a home office. This reluctance was partly due to the complexity of IRS rules in the past and a lingering fear that such deductions might trigger an audit.

However, for those who itemize deductions and seek ways to lessen their family’s tax burden, those concerns are outdated. The IRS has streamlined the process with the introduction of the “simplified” method for claiming home office deductions. Previously, taxpayers had to meticulously calculate the percentage of their actual expenses that were business-related to determine the deduction. Now, taxpayers have the option to multiply the square footage of their office or home workspace by $5 to determine the deduction amount.

Despite the simplification, it’s crucial to note that the stringent requirements for a home office deduction still apply. So while it’s now easier to claim, attempting to deceive the system won’t go unnoticed.

There are a couple of ways that tackling your taxes might actually help you save some money on your tax bill. The first approach is straightforward: Do them yourself, because nothing beats free.

However, there are instances where seeking professional help can be beneficial. Tax professionals have extensive experience navigating various tax breaks, making their services worth considering, especially if you’re itemizing deductions. The good news is you can deduct the cost of hiring a tax preparer or purchasing tax software as miscellaneous deductions. Even the expense of e-filing your return is deductible.

The only caveat is that you can’t deduct the expenses for the taxes you’re currently working on—you can only claim the taxes you paid in the previous year. So, if you’re filing your 2014 return, you can write off the expenses incurred to prepare and file your 2013 taxes.

While these deduction strategies are effective, there’s always more to explore. For additional tax and deduction insights, check out the next page.