Tax season can often put unnecessary strain on families struggling to make ends meet. Coupled with the high unemployment rate as a result of the economic downturn, many households have experienced unrelenting financial pressure. Luckily, the IRS permits a number of deductions available to cushion the budgetary plunge.
In the education sector alone, you’ve got a handful of deductions you can apply to your taxes. Up to $4,000 of you, your child or spouse’s college tuition expenses (including tuition and fees) can be deducted—without being itemized.
“You cannot take the tuition and fees deduction on your income tax return if your filing status is married filing separately, or if you may be claimed as a dependent on someone else's return.”
—IRS Topic 457
Otherwise, you can choose to claim the American Opportunity Tax Credit or Lifetime Learning Credit for tuition and fees. The American Opportunity Tax Credit, available through 2017, is capped at $2,500 for the four years totaling the college education. Individuals earning $80,000 or less as single earners or $160,000 or less as married taxpayers are eligible. The Lifetime Learning Credit spans a broader spectrum in terms of education. This credit has no limit on the number of years it can be claimed and permits up to $2,000 in qualifying expenses. Soundtoo good to be true? Here’s the catch—if you qualify for both credits you’ll have to choose one or the other.
This year, two million people will be forced to declare bankruptcies as the result of unpaid medical bills. The health care sector greatly surpasses credit card debt and even mortgages as the number one cause of bankruptcy filings. The findings are bleak but this little tidbit of information may lessen the worry. You are allowed to deduct medical costs you’ve paid for any individual even if they’re not claimed as a dependent if they lived with you the entire year, they’re a relative, they’re a U.S citizen, legal resident, or resident of Canada/Mexico for a portion of the year, and if you provided more than half of their financial support during that year. So say, for example, you funded a parent’s operation last year but are not able to claim them as a dependent this year because their income exceeds$3,900. You can deduct the expense on the current year’s tax return even if they are no longer qualified as a dependent.
The rules for claiming a dependent are strict but the pay-off is well worth the work. For each individual you claim as a dependent you may be eligible to reduce your income by $3,900.
There are two basic types of dependents: a qualifying child and relative. Although the spectrum is much broader than those two categories, we’re going to focus on the most common dependent declarations.
- Must be a U.S citizen, national, resident OR resident of Canada/Mexico
- Must be the only individual claiming them as a dependent
“If you and your partner don't file jointly, only one of you can claim your child as a dependent. If you both claim your child, you may end up needing IRS audit help from a tax attorney,” says Lawrence Levy, CEO of Levy and Associates.
- The individual cannot be married and filing a joint return
There are a number of other qualifications which must be taken into consideration before you can claim a dependent.
It may seem a little out in left field but if you can employ your child while they’re a minor then you’ll be able to pay them up to $6,100 without facing the income and employment taxes. As an added benefit you can deduct the wages as a business write-off!