Have you been dreading the thought of taxes, knowing you’re going to owe a lot of money? You aren’t alone, but you don’t have to have a massive tax bill.
Taxes for families can be more complex than for single adults with no kids. But before you put off doing your taxes, consider a few ways your family can save money.
Consider the following ways to save money on your taxes.
Look at Tax Credits
One of the biggest things you can do to save money on taxes is to look at tax credits. A tax credit lowers the amount you will owe on your taxes, and you don’t have to worry about deducting expenses accurately.
Taxes for families can easily add up, especially if you and your spouse make a lot of money. If you can’t find ways to deduct your taxable income, tax credits are an excellent option.
Consider if your family is eligible for any of the following tax credits.
Child Tax Credit
The child tax credit lets you save a certain amount of money per year per child 17 years or younger. For each child under five years old, you can receive up to $3,600.
If you have children between 6 and 17 years old, you can get $3,000 per child. Some families have received part of their tax credit as monthly payments in late 2021.
However, even if you didn’t receive those payments, you can get the tax credit. Now, the credit does decrease and eventually drops to $0 at a certain point, so not every family will qualify.
For 2021, the government expanded the child tax credit to help families during the pandemic. It’s possible the credits will decrease in the future, even if your income doesn’t increase.
Child and Dependent Care Tax Credit
You can also qualify for the child and dependent care tax credit. The credit returns up to half of the amount of money you spent on child care and dependent care.
If you had one dependent in the previous year, you can get up to $8,000 back. Families with two or more dependents can get up to $16,000 if half of their childcare bill was more than that.
Before you claim this tax credit, you’ll need to gather receipts for child or dependent care. Ask your daycare center, nanny, or babysitter for records if you don’t currently have your own copies of those documents.
Adoption Tax Credit
If you adopted a child last year, you can qualify for the adoption tax credit. The maximum amount is $14,440 for the 2021, tax year, and that maximum is per child.
You can use the credit to reimburse any adoption-related expenses, such as adoption fees, travel expenses, or legal fees. Of course, this won’t help with taxes for families who don’t adopt.
However, it’s worth knowing about if you did adopt a child. Similar to the child and dependent care tax credit, keep a copy of any receipts related to the adoption to take advantage of the credit.
Now, this doesn’t mean you should go out and adopt a child if that wasn’t already the plan. However, this tax credit is great for families looking to expand.
Earned Income Tax Credit
If you’re low- or middle-income, you may qualify for the earned income tax credit. This credit helps reduce the amount of taxes you owe if you don’t make a lot of money.
The number of dependents you have and if you’re disabled can affect the specific amount of the credit. Usually, the IRS will let you know if you qualify for this credit.
However, you may want to ask the IRS or look for an earned income tax credit calculator. Then, you can determine if you qualify, even if you haven’t qualified for it in the past.
American Opportunity Tax Credit
First-time college students can qualify for the American Opportunity Tax Credit. You can’t have attended college before, and you can’t get this credit for more than four years.
The credit is also only available to people with no prior felony drug convictions. If you’re a single parent, you can get the full credit if you made about $80,000 or less last year.
Single people making up to $90,000 can get a partial credit. If you’re married and file your taxes jointly, the income thresholds double to $160,000 and $180,000. You can get up to $2,500 to help cover educational expenses.
Be sure to take advantage of this tax credit during your time in school since you can’t get it later. That way, you can maximize your tax savings as a family.
Lifetime Learning Credit
The lifetime learning credit is a similar tax credit in that it applies to higher education. However, it doesn’t apply only to first-time college students, but you, your spouse, or one of your dependents has to cover the cost of college.
For 2020, the maximum income threshold for single people was $58,000 to $68,000. If you’re married, the maximum income threshold increases to $118,000 to $138,000 for a full or partial credit.
This can be a useful way to save money on taxes for families who are splitting the cost of college between spouses. It also helps if you have children who are helping pay for their college.
This credit can reduce your tax bill by up to $2,000 if you spent more than $10,000 on college. Unfortunately, it won’t increase your tax return.
You may be able to get a tax credit on the amount of money you contributed toward your retirement. This applies to contributions to an individual retirement account (IRA) or an employer-sponsored 401(k).
With this credit, you can get up to $1,000 if you file alone or $2,000 if you file with a spouse. However, you can’t be a full-time student, and no one else can claim you as a dependent on their return.
Depending on your income, you may be able to get a credit on 10, 20, or 50% of your contributions. The exact amount also depends on how you file your taxes.
People with lower incomes will qualify for a bigger tax credit if they save for retirement. If your income exceeds a certain amount, you won’t qualify for any credit.
Residential Energy Credit
One of the best ways to save money on taxes for families is to upgrade your home. If you made any residential upgrades that helped with energy, you can get a credit toward those expenses.
The residential energy credit applies to things like water heaters, insulation, roofing, and biomass stoves. You can also get the credit if you installed energy-efficient windows and doors.
Other qualifying expenses include efficient heating and cooling systems as well as solar energy. Be sure to save receipts from those purchases to help file your taxes and get this credit.
Consider Potential Deductions
When looking at tax deductions and credits, deductions are more complex. Instead of lowering your tax bill, they lower your taxable income and therefore lower the amount you pay in taxes.
You can look at deductions whether you have regular or self-employment income. Now, you’ll need to prove that you spent the money on certain things to deduct the amounts from your income.
However, tax deductions can be an excellent way to lower your tax liability.
One of the best ways to save on taxes for families is to donate money to charity. You can find 501(c)3 organizations in your area, and you can give money to causes you care about.
In most cases, you can deduct the entire amount of money you donate to charity when filing tax returns. So if your income is $50,000 and you donate $1,000 to charity in a year, your taxable income will drop to $49,000.
Unfortunately, you may not save that whole $1,000 on your tax bill. But you’ll save something, and you get to help a good cause raise money to help people or animals.
Health Savings Account Contribution
Depending on the health insurance plan you have, you may qualify for a health savings account (HSA). An HSA lets you set aside money for qualifying health expenses, and the money never expires.
Whether you have an individual or family HSA, you can deduct the amount of money you contribute to that account. In 2021, the maximum contribution for an individual was $3,600, and the maximum for a family was $7,200.
If you maxed out your HSA in 2021, that means you could reduce your taxable income by thousands of dollars. Be sure to keep receipts of all of your contributions and of expenses where you used the account balance to make the most of this deduction.
Even if you didn’t max out your HSA, you can qualify for a smaller tax deduction. Of course, not everyone will qualify for an HSA, so consider switching insurance plans if you want this deduction in the future.
Student Loan Interest Deduction
If you have any student loans with interest and paid back some of the balance last year, you can qualify for a deduction. While the government deferred student loans in 2021, some people may have still paid off part of their balance.
You could deduct up to $2,500 in student loan interest in 2020. If you paid less than that in interest, you would be able to deduct all of the interest you paid that year.
The maximum should go up with each year, so you can deduct more in the future. That can be a good reason to start resuming student loan payments as you think about your next tax season preparation plan.
If you moved to take a new job last year, you may be able to deduct some of your moving costs. To qualify for this deduction, you have to move at least 50 miles for your new job.
You’ll also have to stay at the new job for 39 weeks of the following year. That keeps people from abusing the moving credit so that they don’t keep finding new jobs.
Even if only one person in your family got a new job, you can deduct lodging expenses for everyone during the move. Sadly, you can’t deduct the cost of meals when you move from one place to another.
Home Office Deduction
If you work from home, you may be able to deduct the amount you spend on your home office. This is particularly true if you work from home for yourself because it’s one of many business deductions.
However, some traditional employees may be able to deduct the costs of their home offices. You will need to determine the size of your office, whether that’s its own room or a desk and chair.
Then, you can use the size and compare that to your entire home’s dimensions. Calculate the percentage of your home makes up your home office, and you can deduct up to that percentage off your rent or mortgage.
To qualify for the deduction, you must only use your office for work. You can’t use the space to do anything for school or personal reasons.
Paying an Accountant
It may sound counterintuitive, but hiring an accountant may help you qualify for tax savings. You can deduct the amount of money you spend to hire an accountant when you file your taxes.
Whether you have a business or not, this can be an easy way to lower your taxable income. An accountant may also help find other ways to save taxes for families in specific situations.
Depending on your situation, you may be able to save hundreds or thousands of dollars overall. Then, you can add the amount of your accountant’s bill to your deductible income.
When filing tax returns, you may find that you don’t have to pay as much as you would have. Or you might get a larger return than you expect. Plus, your accountant may be able to help you if the IRS audits you or if you have other issues.
Taxes for Families: They Don’t Have to Be Stressful
Planning for taxes for families can involve a lot of work. You have to calculate your income and that of your spouse, and you need to consider various expenses that may qualify for tax deductions and credits.
Then, you can add everything up and file an accurate tax return while lowering your tax bill. Soon enough, you can get the biggest refund possible with your finances.
Do you need help estimating your income taxes to plan for tax season? Use an income tax calculator.