Taxes can hit families pretty hard. It can be tough enough as it is to save up for the ongoing expenses of running a household, raising children, and managing the growing costs of childcare, education, medical treatment, and insurance for a multi-head household without the toll of high state and federal taxes. Thankfully, families with multiple dependents can claim unique tax benefits to offset some of the cost of raising children and managing a large home. In years past, one major tax benefit for large families has been personal exemptions.
However, since 2017, personal exemptions have been eliminated.
Personal exemptions were a calculated amount of money that you could exempt from your adjusted gross income for income tax purposes, based on your information and the number of dependents you supported. Basically, the more people you were legally responsible for, the less you had to pay in taxes.
In 2017, a personal exemption was $4,050 per person. The way it worked is that you couldn’t claim a personal exemption if someone claimed yours, so to speak. So, if you were listed as someone else’s dependent but still earned income, and they claimed your personal exemption for their tax return, you couldn’t claim it a second time.
If you were mostly claiming your children, for example, who may not be employed yet and haven’t had to write a return of their own, then the personal exemption was a plainly good thing.
Furthermore, there were income limits. If your adjusted gross income for the year exceeded a certain level, you were no longer eligible for a personal exemption. In 2017, that limit was $436,300. Taxpayers earning between $262,500 and $436,300 received an increasingly smaller personal exemption per eligible dependent. As such, the personal exemption largely benefited families with less income.
What Happened to Personal Exemptions?
Major tax reforms have taken place since 2017, and while the personal exemption is still officially slated to return in 2025, tax experts are advising people not to hold their breath. Congress is likely to pass a few things about 2017’s temporary tax changes into permanent law, including the axing of the personal exemption.
If you were eligible for a personal exemption that you did not claim in 2017 or earlier, the deadline to address this mistake has long since passed. Tax returns can be edited as far back as three years – but no farther, under most circumstances.
Are Personal Exemptions Coming Back?
Maybe, but probably not. While President Trump’s Tax Cuts and Jobs Act eliminated the personal exemption limit, it also changed a lot of other tax laws.
For example, the TCJA boosted the standard deduction, which is the amount you can write off if you choose not to itemize your individual deductions (such as certain expenses, charitable gifts, and local taxes). In 2014, taxpayers could claim a standard deduction of $6,200 if filing as single, or $9,100 as head of a household. In 2023, the standard deduction for the head of a household is $20,800.
In addition to these changes, low-income households and families may still claim certain tax credits to minimize their tax liability and offset their annual tax burden.
Check Out These Tax Credits
Tax credits and tax deductions are important tools for taxpayers looking to save money. Tax deductions minimize the amount of tax you owe. Tax credits reduce what you owe, or increase your potential refund, and may be refundable.
This means that if you’ve paid every penny owed to the government via withholding, then every refundable credit you are eligible for translates into money back in your pocket out of the government’s very own coffers.
Eligibility for these credits can be tough, however, and may even delay your refunds. Here’s what you need to know:
You can claim a dependent if you pay for at least 50 percent of their financial support. This means only one parent can claim a child as their dependent, and it is usually the parent whose income provides for the kids the most.
Furthermore, dependents cannot claim dependents. If you are someone else’s dependent, you cannot claim dependents of your own.
Child Tax Credit
The child tax credit is a per-dependent tax credit on every eligible child that you care for. But eligibility here is crucial. While the CTC is one of the best tax credits to qualify for in terms of value, it’s important to check and double-check if you and your children are eligible.
In 2023, the CTC amounts to $2,000 per child. At most $1,600 of that money is refundable. It’s important that your children have Social Security numbers, or else they cannot be claimed as eligible dependents for the Child Tax Credit.
Tax Credit for Other Dependents
If you have dependents over the age of 18, you can claim a separate tax credit for them. This one is only worth $500 per dependent, but it is better than nothing. Rather than a Social Security number, adult dependents must be identified by the taxpayer identification number (ITIN).
Unlike the Child Tax Credit, the Tax Credit for Other Dependents is not refundable, meaning if you’ve already paid your taxes, it isn’t going to do anything other than shave off any tax debt you might not have accounted for.
Child and Dependent Care Credit
Another non-refundable tax credit that might help with outstanding tax bills is the Child and Dependent Care Credit.
Unlike the Child Tax Credit, this credit aims to reduce a working family’s tax liability by offsetting either $8,000 (for a single eligible dependent), $16,000 (for two or more eligible dependents), or 50 percent of the cost of childcare, whichever is less, depending on your income and number of child dependents. No simple loopholes here – the person hired to take care of your child cannot be your spouse, the other parent, or another dependent (such as your older child).
This amounts to a sizable annual reduction in taxes owed, as long as you had to pay for supervisory care while you were out at work. The age limit for this credit to count is only 13.
Earned Income Tax Credit
This is another big tax credit, and yet another refundable tax credit that can delay your refund (like the Child Tax Credit). The Earned Income Tax Credit is available to all households regardless of whether they have any dependents, but the more dependents you support, the greater your credit.
Income is key here – the more you earn, the more your Earned Income Tax Credit is reduced, phasing out entirely at higher incomes. Filing status matters as well. Married couples can claim a larger exemption, for example, than single or head-of-household filers.
The point is to help reduce the burden on lower income working households and help large families, in particular.
Eligibility is even more complicated than the Child Tax Credit. You must be accurate when reporting for and claiming an EITC. The IRS tends to perform a quick audit on tax accounts that claim an EITC, which is partly why it takes longer for EITC-related refunds to be distributed. The IRS offers certain tools to check for EITC eligibility. You can also speak to a tax professional for more information.
Other Important Tax Credits
While that covers all the major tax credits, there are a few additional ones to look out for:
Education Credits
Student loan interest, work-related educational costs, and teacher educational expenses are a few ways in which working families can reduce their taxes.
Medical Deductions
Eligible families can cut a portion of their medical expenses out of their taxes. Here’s what the IRS allows.
State Tax Credits
Many states run their own versions of the federal Child Tax Credit and Earned Income Tax Credit, as well as state-specific programs. Check a list of currently maintained state-specific tax credits for families here.
For more information about minimizing your tax liability and making the most of your income, get in touch with us at Rush Tax Resolution.
