2021 Tax Guide for Parents: Everything You Need To Know
From claiming new babies to understanding how the stimulus payments affect your taxes, we got you covered.
Taxes can be confusing in an average year, but the Covid-19 pandemic has created additional bewilderment this tax season. Whether you received unemployment income last year, qualified for the Child Tax Credit, or are simply just trying to figure out taxes as a new parent, you might have questions. This tax guide for parents navigating the 2022 tax season covers all the bases.
Before filing your taxes in 2022, make sure you have:
- The social security number of all dependents, yourself, and your spouse (if applicable)
- Letter 6475 from the IRS (if you are claiming dependents under 18)
- Letter 6419 from the IRS (if you received Advance Child Tax Credit Payments)
- Tax form 1099-G (if you collected unemployment in 2021)
Important terms to understand:
Nonrefundable Tax Credit
A nonrefundable tax credit will only reduce your tax liability, it will not create a refund.
Refundable Tax Credit
A refundable tax credit will tack on an additional refund beyond just reducing your tax liability.
The Earned Income Tax Credit
The Earned Income Tax Credit is a refundable tax credit for low to moderate income families. The income limit varies based on your marital status and number of dependents you are claiming. Here’s one example, according to the IRS Earned Income Tax Credit table: A married couple with one child would be eligible for the credit if their combined earned income was under $48,108. Married couples filing individually are not eligible.
Child Tax Credit and the Credit for Other Dependents
The Child Tax Credit and the Credit for Other Dependents are nonrefundable tax credits. The child tax credit can be used in conjunction with the Additional Child Tax Credit, which is a refundable tax credit.
The definition of a dependent is fairly flexible and the rules vary, says Greene-Lewis. For example, a dependent could include a child aged 18 or older for whom you provide more than half of their support, or a qualifying relative who earned less than $4,300 and for whom you provide more than half their support. “Relatives don’t have to live with you, but if it’s a friend, they have to have lived with you for the entire year,” explains Greene-Lewis.
Child and Dependent Care Tax Credit
The Child and Dependent Care Tax Credit is a nonrefundable tax credit that you can use to claim expenses related to the care of a child or another dependent. This includes day care and preschool tuition.
Recovery Rebate Credit
If you didn’t get the full Economic Impact Payment, you may be eligible to claim the Recovery Rebate Credit.
Per the IRS, tax benefits for adoption include both a tax credit for qualified adoption expenses paid to adopt an eligible child and an exclusion from income for employer-provided adoption assistance. The maximum amount (dollar limit) for 2021 is $14,440 per child.
Tax tips for parents who had a baby in 2021
Parents who had a baby in the 2021 calendar year are eligible to receive the Child Tax Credit, which offers up to $3,600 for each child 5 and under, and $3,000 for each child aged 6-17 at the end of 2021. This is an increase from the $2,000 credit per child in 2020. (See our glossary below for a more detailed explanation of various relevant credits.) You will need your baby’s social security number to claim them.
The application for your child’s social security number is normally processed when you fill out your child’s birth certificate at the hospital. If you had a home birth and haven’t already, you should contact your county ASAP to find out how to register your birth and receive a birth certificate and social security card.
Also, if you had a baby in 2021 and you were eligible to receive the third stimulus payment for that baby (individuals making $75k per year and couples making up to $150k per year were eligible), you will want to claim the baby on your taxes so that you can get the check. Lisa Greene-Lewis, a CPA for TurboTax, explains that when the government issued the stimulus payments, “they went by your previous tax filing” — looking either at 2018, 2019, or 2020. So, she says, you should be able to claim the additional stimulus payment for the baby that you had in 2021.
The stimulus money can be included in your tax refund (or reduce the amount of taxes you owe) by claiming the 2021 Recovery Rebate Credit on your tax return. Be sure to have Letter 6475 from the IRS that shows how much stimulus payment you received so your credit can be calculated. You should have received the letter by early February 2022. If you can’t find it, sign in to your online IRS account to see what Economic Impact Payments you received.
And depending on whether you took paid or unpaid family leave following the birth of your child, your taxes can be affected. For example, if your employer withheld taxes in 2021 over the duration of your unpaid leave, that will get returned to you when you file.
All of these tax saving tips for parents and credits are not only for biological children. Babies who joined your family via adoption of foster care are also eligible for the Child Tax Credit, and may also be eligible for the Adoption Credit, which is worth up to $14,440 per child.
Claiming children under the age of 18
Children who were 17 or under on December 31, 2021 are eligible for the Child Tax Credit. (In 2020, the Child Tax Credit only applied to children ages 16 and under). In situations where parents are divorced, or do not live together, the custodial parent with whom the child lives for more than half of the year will get the credit. Noncustodial parents can claim the child if the custodial parent agrees and signs Form 8332, the Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent).
Tax credits for children can be affected by how much you earned in 2021. The Coronavirus relief package, passed in December 2020, included a provision allowing you to use your 2019 income to qualify for more earned income tax credit, because many people were unemployed or worked reduced hours in 2020, according to Greene-Lewis. “Sometimes when you have a lower income, it can lower your credit (there’s a whole calculation behind it). So because of this, the IRS passed a provision [for that].” This still applies and will be helpful to parents who received unemployment in 2021.. See more on that below.
The IRS website can also provide helpful tax tips for parents and has an Interactive Tax Assistant tool called “Is My Child a Qualifying Child for the Child Tax Credit?” to help you determine if a child qualifies for this credit.
You can find Earned Income and Earned Income Tax Credit Tables here.
Should you claim children age 17 and older on your taxes?
Many tax saving tips for parents focus on whether an older child should be claimed as a dependent. You can only claim 17- and 18-year-olds as dependents if you provide more than half of their support. You can claim 19- to 24-year-olds if they are full-time students at least 5 months of the year, live with you at least half the year, and you provide at least half of their support. However, children over the age of 17 whose parents claim them on their taxes are not eligible for a stimulus check.
Sometimes the amount of money your child will receive via a stimulus check is greater than the amount you would save on your taxes by claiming them. “There are some [situations] this year where it will make more sense for the child to claim themselves, depending on how much money they made. I had a client whose college student made $15K in 2020. In that scenario, it was better for the college student to claim themself so that they could get a stimulus payment,” Bernadette Harris, CEO of By the Book Accounting in Braselton, Georgia tells Romper.
A single person under the age of 65 must file taxes if they made $12,550 or more in a given year. Most college students do not earn this amount, but it may still be beneficial for them to file their own taxes (as opposed to you claiming them as a dependent) because they may be able to claim the 2021 Recovery Rebate Credit and get a tax refund. You may want to have your tax consultant review your taxes with you (or, if you do your taxes yourself, run each scenario through the software before officially filing) to determine which option would be better.
Child Tax Credit payments
If you received the monthly advance child tax credit payments that began in July 2021 and ended in December 2021 you should have received Letter 6419 from the IRS. This letter was sent out in December 2021 and January 2022. If you and your spouse filed joint returns previously, you each should have received a letter. This letter is important because it provides the total amount of child tax credit payments you received. The letter will be needed when you file taxes to compare how much credit you can claim.
If you received (or didn’t receive) Covid relief aid
Checks or debit cards that were mailed out or direct-deposited due to the American Rescue Plan Act of 2021 (also known as the American Rescue Plan) are not considered to be taxable income. However, if you did not receive one, but are eligible, you may be eligible to claim the Recovery Rebate Credit on your taxes, as mentioned above. This credit can be used for any stimulus payments you have not received.
If you were unemployed in 2021
You will receive tax form 1099-G if you received unemployment in 2021. Unemployment income is taxable, but because the IRS considers it unearned income, you will not qualify for the Earned Income Credit, a credit that low to moderate earning families can claim, which many parents rely on.
However, there is a workaround for this. According to Danielle White, an MBNA and a partner at DW Financial Services, Inc. in Jenkintown, Pennsylvania, the Child Tax Credit and the Earned Income Credit will have exceptions for this year (like in 2020) to support parents who were unemployed: If you earned more in 2019 than you did in 2021, you can use your 2019 income to determine whether or not you qualify.
Important 2022 tax dates:
The federal income tax filing deadline for the 2021 tax year is Monday, April 18, 2022.
October 15 will be your tax deadline if you get an extension.
The IRS opened for E-Filing on January 24, so you can now process your tax returns (electronically is the most efficient way to file and get your refund). According to Greene-Lewis, when you e-file your taxes, it automatically checks the social security number, which will ensure that you entered information for yourself or your dependents correctly.
Bernadette Harris, CEO of By the Book Accounting in Braselton
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