3 Income Tax Tips for Parents Who Want to Maximize Their Returns
It's that time of year again! We're starting to think about gathering the paperwork for our income tax returns, and inevitably, we wonder if we're capturing all the credits and deductions to which we're entitled and if there are any big changes to tax laws that we should know about.
It's complicated stuff, so we turned to Nikali Luke at Simplified Tax and Accounting, which has eight locations across mid-Michigan, to review the most common tax topics:
We hear that claiming a child on your tax return can make a big difference. Can you share some details with us?
Nikali: Claiming a child is probably the biggest change my clients will see. The Child Tax Credit is now $2,000 for each child younger than 17. You also might be able to claim a $500 credit for children who are 17 or older and are full-time students.
There's also the Child and Dependent Care Credit for working parents with children younger than 13. The IRS allows up to $6,000 of daycare expenses, and the credit can be up to 35 percent of those costs. Don't forget that day camps during the summer usually qualify for this credit, too.
Are there any other credits that relate to education?
Nikali: Yes, The American Opportunity Tax Credit is one of my favorites. It is a 100 percent credit for the first $2,000 of qualified educational expenses. It maxes out at $2,500 and a portion of the credit is actually refundable, which is very rare in the tax code. It's also important to note that if you are claiming the student, you are allowed to take the credit even if you didn't personally pay the education expenses. So if grandparents helped pay for school or if a loan was used, you are still allowed to take the credit this year.
What about credits for saving for education in the future?
Nikali: Michigan allows a deduction for contributions to the Michigan-based education savings plans. If you contribute to either the MESP or the MET, you can take a deduction against your Michigan income. The contribution doesn't need to be for your child, so if you contribute for your grandchild or niece or nephew, you are allowed to claim that on your personal income tax return.
When it comes to your tax return, there are very specific rules for what is deductible, how many credit hours you need to qualify and income limitations.