It's the most horrible time of the year: tax season. It's probably safe to say that no one has ever looked forward to filing their taxes, and it's no wonder, when something as simple as checking the wrong box could cost you some serious cash. So what are some of the biggest mistakes parents make when filing their taxes? It pays to know what you're doing (literally).
The truth is, parents have a lot more to consider at tax time than their childless counterparts, and it's not as simple or straightforward as you might hope. There are a variety of factors that will affect how you file, including the size of your family, the ages of your kids, and whether or not you're married. So before you sit down to sort through all your statements and receipts (what fun!), you'll want to find out exactly where you stand and what the IRS needs from you to make sure you don't end up shelling out more than absolutely necessary.
Romper reached out to Megan McManus, Tax Manager at San Francisco Bay Area accounting firm Sensiba San Filippo, to find out more about some common missteps parents make when filing — as well as what you can do to avoid them (and hopefully make the process a little less painful!).
1. Wrongly Claiming Dependents
This one applies mostly to single parents, or couples who file separately — and it's definitely something you need to talk about with your child's other parent or co-parent before you file.
"Only one parent is permitted to claim a dependent each year," McManus tells Romper. "Generally, the parent with custody (the custodial parent) of the child the majority of the year claims the dependent," she explains.
There are exceptions to this rule, however; as McManus added; a non-custodial parent can claim the dependent exemption if the custodial parent signs a waiver foregoing their right to claim the dependent. If a parent wrongly claims a child, however, they'll receive a notice from the taxing authority adjusting their tax return to add back all of the benefits related to claiming the child, says McManus. And what's worse, they'll also impose interest and potentially penalties on the tax due.
2. Wrongly Claiming Head Of Household
You might think that because you're the head of your household (well, you do run the place, after all) you can claim 'head of household' on your taxes, but that might not be the case. First of all, this status is only for unmarried people — but there's even more to it than that.
"Beginning in 2018, the Tax Cuts and Jobs Act expands the due diligence requirements for paid preparers to cover determining eligibility for a taxpayer to file as head of household," McManus says.
"A penalty of $500 (adjusted for inflation) is imposed for each failure to meet these requirements."
You won't have to worry about that penalty until you're filing your 2018 taxes (in 2019), but filing head of household is still something you don't want to get wrong. So what are the requirements? As a guide on SmartAsset (updated for this year) explains, there are three: 1. You must be unmarried (or considered unmarried on the last day of the tax year). 2. You must have paid over half the costs of keeping up a home for the year. 3. You must have a qualifying person (someone you financially support) living in your home with you for over half the year. Failure to prove that you fit the bill could cost you, so be careful!
3. Not Claiming The Child Tax Credit
This area might be particularly confusing for parents when they're filing their taxes next year, as the new tax bill included some changes in this area which might seem positive at first, but probably aren't: In short, while the child tax credit was doubled, exemptions were eliminated, meaning that for most parents, more of their income will be taxable than before. (So you'll really want to claim those credits.)
"The child tax credit is increased from $1,000 to $2,000," says McManus of the new tax plan.
You'll still want to make sure you claim those credits this tax season, though, as they could still save you a lot of money. While these credits do phase out for higher earners, many parents are still eligible; according to the TurboTax website, the child tax credit is reduced or eliminated only if your adjusted gross income is above certain thresholds.
"The credit amount is reduced by $50 for each $1,000 (or fraction thereof) by which the taxpayer's modified adjusted gross income (AGI) exceeds the threshold amount," the site explains.
The thresholds this year are as follows: $110,000 on a joint return; $75,000 for an unmarried individual; and $55,000 for a married individual filing a separate return.
Under the new tax bill, McManus says, the income levels at which credit phases out will increase to $400,000 for married taxpayers filing jointly and $200,000 for all other taxpayers.
4. Not Getting A Social Security Number For Newborns
Dealing with the IRS might be the last thing on your mind right after you have a baby, but it's super important that you get your new arrival a social security number before tax time. The hospital will likely send you home with the necessary paperwork, but it's still up to you to do the rest. As Mark Luscombe, principal federal tax analyst for the tax firm CCH, told U.S. News & World Report, if you don't have a social security number for your child when you file, the IRS could disallow some of the tax benefits.
5. Not Understanding the Kiddie Tax
Usually, the word "kiddie" refers to something fun and child-sized, like a ride at an amusement park. No such luck with the "kiddie tax," which refers to tax on a child's investment or other "unearned income" (such as an inheritance or award money). Sometimes, parents will just lump together their child's investment income as part of their own income — but this is a bad idea, because it can end up putting you in a higher tax bracket, meaning you'll have to pay more.
In 2017, up to $2,100 of unearned income received by a child is subject to the lower — or potentially non-existent — tax rate of the child, while income over $2,100 spills over into the parents' return, to be taxed at their rate.
Under the new law, however (which won't affect you this year), "the child's tax is no longer affected by the tax situations of the child's parent(s)," McManus says.
This all probably seems overwhelming, but just take it one step at a time. And if you're really struggling, consider asking a professional for help. It might seem pricey, but it could save you money in the end!
Check out Romper's new video series, Bearing The Motherload, where disagreeing parents from different sides of an issue sit down with a mediator and talk about how to support (and not judge) each other’s parenting perspectives. New episodes air Mondays on Facebook.