When you're no longer on your own as a single taxpayer, your tax return will naturally be a bit more complicated. But that's usually a good thing, tax-wise, because it means you owe less tax.
Step 1. Add Your Family to Your Return
It all starts with who's actually on the return. If you’re doing your taxes with 1040.com, two screens take care of getting everyone present and accounted for:
Right off the bat, just getting all your family members added to the return will reduce your taxes. That’s all thanks to the exemption you get for each person. For 2015, that’s worth $4,000 taken off the top of your taxable income – $4,000 for each person.
Step 2. Get the Credit(s) You’re Due
Next you’ll want to take advantage of any special credits that you’re eligible for. We cover some of the biggest ones here:
There are lots of new and exciting challenges with a new child, and how your new child will affect your taxes is probably not even on your radar. No worries, it’s nothing but good news.
First things first: Do you have to prorate tax breaks based on when your child was born? Nope. Even if born on the last day of the year, the IRS counts little Johnny or Susie as having lived with you all year. That means you get the full value of the tax breaks available to parents.
Let’s start with the most basic tax break, the personal exemption. That’s a flat amount subtracted from your taxable income. For 2015, that’s $4,000. You get one exemption for each taxpayer (parent) and dependent on the return.
Child Tax Credit
Next up is the Child Tax Credit, which gives you up to $1,000 for each eligible child dependent. The credit is refundable, meaning you can get a refund from it even if you have no tax liability for the year.
There are income limitations on who can get the credit. If you’re single, you can claim the credit if your AGI is less than $75,000. If you’re married filing jointly, that figure goes up to $110,000, and if you’re filing separately, it’s $55,000. In addition to the requirements for a qualifying child, the child must meet these requirements:
Additional Child Tax Credit
This is one poorly named credit. The name doesn’t mean it’s a credit for an additional child, it means it’s an additional credit for a child. So if you don’t have two children, don’t fret. This credit is for parents whose AGI is too high to claim the full Child Tax Credit. And like the Child Tax Credit, the Additional Child Tax Credit is refundable.
When you file your taxes with 1040.com, dependent-related tax breaks are figured for you automatically. All you have to do is fill out the Dependent screen for each child, and we’ll take care of the rest
All About the Adoption Credit
Adopting a child is a long, difficult and sometimes expensive process. But along with all the other tax breaks for parents, the adoption credit can help ease at least the financial stress of adding a new child to your family.
The Adoption Credit is a nonrefundable tax credit. That means it can’t give you a refund by itself, but it does take a good chunk off the top of your tax liability. So much, in fact, that you probably won’t even be able to use up all the credit in one year. Good news: you can roll over what you don’t use for five years.
Now, let’s take a look at how this credit helps adopting parents.
The Adoption Credit is a tax credit with a maximum value of $13,400. Why a maximum? If your adoptions costs are less than the maximum, what you actually paid is your maximum credit (unless it’s a special needs adoption – see below). And the total is not just for one year’s expenses, but your total for the adoption, which can span years.
The credit offsets qualified adoption expenses, such as court costs, attorney fees, traveling expenses (meals and lodging), and other related expenses.
A qualifying adoptee must be one of the following:
If you’re adopting a U.S. citizen or resident, you must wait one year before claiming the credit for qualifying expenses. Starting the adoption process this year means you claim any qualified expenses on next year’s return.
if you are adopting a child who is not a U.S. citizen or resident, you must wait until the adoption is final before claiming the credit.
The total value of the credit begins dropping when your modified adjusted gross income (MAGI) is $201,010, and phases out completely when your MAGI exceeds $241,010.
Special Needs Adoption
If you’re adopting a special needs child, you may be entitled to the full credit even if you had little or no out-of-pocket costs.
For a special needs child, the eligibility requirements are:
Claiming the Credit
To claim the adoption credit, just add Form 8839 – Qualified Adoption Expenses to your 1040.com return. (Our interview will help you add the form.)
Child and Dependent Care
Making sure your children are cared for while you work can be costly. That’s why the Child and Dependent Care Credit is such a great tax credit for working parents. The credit can take up to $3,000 off of the top of your taxable income, or even double that if you have more than one child in child care.
But the credit not only applies to children under 12, but also to dependent adults. Let’s look at what dependents are eligible.
The credit lets you recoup up to 35% of your qualifying expenses. The maximum is $3,000 for one dependent, and $6,000 for two or more dependents.
The credit is reduced at higher income levels. If your AGI is less than $15,000, you get a credit of 35% of all qualified expenses. Then, for every $2,000 your AGI increases, the percentage decreases by 1%. At $43,000 and above, the credit is fixed at 20% of qualified expenses.
BUT: If your employer pays for a dependent care benefit plan, your maximum credit is reduced by that amount. Example: John’s maximum allowance for dependent care is $3,000, but his employer pays $700 yearly for dependent care. John’s maximum allowance is now $2,300.
Any dependent child under the age of 13, but there are some other requirements:
Having a qualifying adult dependent – a spouse or relative – who is incapable of caring for themselves may qualify you for the credit. If the dependent is not cared for by you or your spouse and the dependent lived with you more than half the year, any qualifying expenses can be deducted. Adult day-care programs and similar programs are qualifying expenses.
Claiming the Credit
Claiming the Child and Dependent Care Credit is a two-part process. First, fill out the Dependent screen for the child or other dependent, including the amount of child or dependent expenses you paid for the year. Then fill out the Form 2441 – Child and Dependent Care Expenses screen to provide particulars about the care expenses and who they were paid to.
3. Account for Special Situations
Family life has lots of wrinkles – special situations where you’re just not like most families. Thankfully, you have options and tax breaks that can help a lot
If you’re a foster parent, it can be confusing to try to figure out what tax breaks and advantages are available to you. Foster children are often not eligible for some of the same credits and deductions as biological or adoptive children. But there are a couple of valuable tax breaks available to you.
First, let’s define who a foster child is: A foster child is a child placed with you by judgment, court order, or an authorized placement agency (state or local government organization). If the child has not been placed with you by the courts or a government agency, you can’t claim foster care tax breaks. But you may be eligible to claim the child as a dependent.
Now, let’s look at two tax breaks specifically for foster parents.
Foster Care PaymentsIf you receive foster care payments from a child placement agency, or the state or local government, the payments are nontaxable income. The reasoning here is that the money is for the support of the foster child, and aren’t just going into your pocket for your use, the way other income would.
Foster Care ExpensesYou may also be able to deduct your unreimbursed foster care expenses as a charitable donation. The expenses are deductible if the agency or organization who placed the child with you can receive charitable donations. If the agency can’t accept charitable donations, the unreimbursed expenses may qualify as support provided by you. And support provided by you counts toward your being able to claim the child as a dependent. If you provide at least half of the support for the child and meet the other requirements, you qualify for claiming the child as a dependent.
Claiming a Foster ChildAdding a foster child to your tax return is essentially the same as adding any other child. It all starts with the Dependent screen. For the relationship, choose Foster Child. Provided that you meet the requirements, we'll automatically apply the dependent exemption to your return.
Getting married or divorced is one of life’s major milestones, and either can raise questions when it’s time to do your taxes. Do I have to change my last name? How do I file now? When does my marriage or divorce count? It’s fairly simple, once you know the IRS rules.
MarriageTo begin with, if you get married any time within the year, the IRS considers you married for the entire year (provided of course that you’re not already divorced by the end of the year). That means you can file a married return.
There are two married filing status:
Important: If you’re filing jointly in a community property state, any taxes, penalties, or other monies due are the responsibility of both people. This also applies when married filing separately: both spouses are responsible, even if one spouse earned all the income. Even if a divorce decree states that your spouse is responsible for any monies owed, you may still be liable for the amount as well.
DivorceIf you get a divorce or become legally separated, you can file as single for the year. If you have any qualifying dependents, you can file as head of household, which is desirable, as it lowers your taxes more than the single filing status.
It’s a common belief that if you’re the head of a household of one – yourself – you can file as head of household. Nice try, but not so: you have to have at least one dependent.If you pay alimony to your former spouse(s), you can deduct the alimony you paid for the year to each spouse.
Changing Your NameIf you changed your name when you got married or divorced, you should notify the Social Security Administration (SSA) of the change before you file your taxes. The IRS matches your return to records it gets from the SSA, and if they don’t match, it will reject your return. Alternatively, you can just file your return with your old name.
Claiming a dependent gives you a valuable tax break in the dependent’s personal exemption, which reduces your taxable income. But there are a couple of other tax breaks associated with dependents that can also help.
First, the tax code offers a special filing status if you have a dependent and are single or are otherwise not living with a spouse. This is the head of household filing status, and it’s a real no-brainer if you qualify. Bottom line, you’ll owe less in taxes.
And if you qualify for the Earned Income Credit (EIC), having a dependent child increases your credit amount.
Let’s take a look at the rules for each of these tax breaks.
Head of Household Filing Status
Filing as head of household gives you a higher standard deduction and lower tax rate than filing as a single person or as married filing separately. To file as head of household:
The qualifying dependent can be a child or other relative. And if it’s your parent, he or she doesn’t have to live with you for you to claim the head of household status.
Filing as Head of Household When you do your taxes with 1040.com, filing as head of household is a simple matter of selecting the filing status on our Name & Address screen. Then just add a qualifying dependent, using the Dependent screen.
Earned Income Credit The Earned Income Credit (EIC) is especially beneficial for lower income taxpayers. It’s popular because it’s refundable, meaning it can give you for a refund. You can qualify if you’re single or married, with or without dependent children. You just have to meet income and certain other requirements.
And note that it’s only dependent children who can increase your EIC amount. The child has to be younger than age 19 at the end of the year, or age 24 if a student, or can be any age if disabled. Other dependents have no effect on EIC, but they can still qualify you to file as head of household.
Having a dependent child affects EIC in two ways: by letting you earn more and still qualify for the credit, and by increasing the amount of credit you get.
First, the higher income levels:
Now, the increased credit amounts:
Note: These are the maximum credit amounts. As your income goes up and gets closer to the relevant maximum, the credit decreases.
Claiming EIC So, is it hard to figure out how much credit you qualify for? Nope. We automatically add EIC to your 1040.com return when you qualify, and figure out the right amount for you. To make sure you get the maximum amount you qualify for, just make sure you add any qualifying children with the Dependent screen. Other than that, also check Form 8867 – Earned Income Credit Checklist, to see if any of the special situations apply.
Reporting Alimony and Child Support
After a divorce, it’s common to forget that alimony and child support will affect your taxes. Here’s how.
When you pay alimony, the payments are deducted from your taxable income, which lowers your tax liability. But you have to meet certain requirements:
If you receive alimony, you must report the payments as income on your taxes. And you have to give your ex-spouse your SSN, so that he or she can claim the payments on their taxes. Your ex probably can get your SSN from a prior tax return, but if he or she doesn’t have your SSN and can’t get it from you, the IRS can fine you $50.
When you do your taxes with 1040.com, report alimony received on our 1040 – Income Section screen, line 11. Report alimony paid on our 1040 – Adjustments Section screen, line 31. Child Support
Child support payments don’t affect your taxes nearly so directly as alimony:
In either case, there’s no form where you need to report your payments.
If you pay child support, even though you get no tax break for the support payments, the fact that you are making payments means you at least partly support the child, so you may be able to claim the child as a dependent.
Filing as a Widow(er)
When your spouse dies, the IRS provides a short-term additional tax break in the form of a special filing status, qualifying widow(er) with qualifying child. Here are the details about using this filing status after the loss of a spouse.
The First Year The year that your spouse dies, you can still file a joint return if you didn’t remarry and the executor approves the joint return. But if either spouse was a nonresident alien at any time during the year, the surviving spouse can’t file a joint return.
If you do file jointly, include all of your income and deductions for the full year, but only your spouse’s income and deductions until the date of death. If the deceased spouse owes any taxes that the estate can’t pay, you as the surviving spouse may be liable for the monies owed.
The Next Two Years For two tax years after the year your spouse died, you can file as a qualifying widow or widower. This filing status gives you a higher standard deduction and lower tax rate than filing as a single person. You must meet the minimum requirements:
Filing as a Widow(er) Just select the filing status on the Name & Address screen in your 1040.com return, then provide your spouse’s name, SSN and date of death.
And remember, for the year your spouse died, use the married filing joint filing status. Then for two years after, you can use the qualifying widow(er) filing status.