Posted by Income Taxes and Bookkeeping LLC

Credits You Can Claim in the Absence of Personal Exemptions

Credits You Can Claim in the Absence of Personal Exemptions

Some profound tax changes came around in Jan 2018 with the passing of the Tax Cuts and Jobs Act (TCJA). As a result of this law, the personal exemption was suspended till 2025. It was a powerful tool that allowed taxpayers to reduce their tax as they could claim one for themselves, their spouse, and all the dependents. 

Understanding Personal Exemptions 

In 2017, the value of the personal exemption was $4,015. This means that for yourself, your spouse, and all your kids, you can remove $4,015 each. As a result, a married couple with four kids can remove $24,625 - 4,050 times six from their income before they claim the standard deduction or itemize 

Till the end of the 2025 tax year, this 4,050 times five per individual vanishes. The TCJA did remove not only the personal exemptions but also doubled the standard deduction. With this, the effect of these changes on the tax might not be excessive if you can claim other breaks.

Head-of-Household Filing Status

If you meet the head of a household qualification, you can claim huge deductions compared to filing as single. This translates to $18,800 and not the $12,550 which single filers can claim for the 2021 tax year. 

For you to claim this filing status, you need at least a dependent. Just a single dependent claim can remove $6,250, which translates to the difference between the standard deduction for the single and head of household deduction from your taxable income of 2021

Asides from the qualification of claiming a dependent, an head of household needs to be "unmarried." This means being single or not living with the spouse for the past six months. Also, half of the expenses involved in maintaining the house during the tax year should rest on you. 

The Earned Income Tax Credit

It is unnecessary to have a kid as a dependent before you qualify for the Earned Income Tax Credit. However, this credit can give you huge cash if you have a kid or more. The idea behind the credit is to make some lower-income earners have more money. 

One needs to have earned income to merit this income, even though not much. For the 2020 tax year, unearned income that comes from the investment is pegged at $3650. Adults kids cannot qualify you for this credit. The qualifying dependents must be kids below 19 years by the tax year-end and 24 if they are a student. 

Qualification for EITC is still possible without a qualifying kid and income that is not above $15,820 for the tax year. You cannot file a joint return, although there is a possibility to earn as much as $21,710 if filing as married and jointly. The maximum credit you can have without a dependent in 2020 is $538. For taxpayers with qualifying dependents of three or more, the value rises to $6,600. 

Education Tax Credits

Luckily, the two education tax credits were spared from the TCJA: the American Opportunity Credit and the Lifetime Learning credit. Taxpayers can claim any one of them, but not the two provided any of you, your spouse, or your kids qualify.

There is also the opportunity to claim one of the credits for a kid and another for the other kid. If you have more than one kid in higher education. However, there is no provision to use a single student's expenses to claim both.

For a kid to be eligible for the American Opportunity Credit, he/she must be in the first year while this restriction does not exist for Lifetime Learning Credit. Each qualifies for a maximum AOC of $2,500. 

Also, the presence of dependents will help you qualify for tax deductions related to education. For instance, there is an interest deduction on student loans worth as much as $2,500 of interest paid on student loans over the year for you, your dependents, or your spouse. 

The Medical Expense Deduction

Your dependent expenses can also add to the medical expense deduction you get from medical expenses if you are going by the itemizing rule. There is a provision to claim a deduction for the part of your entire expense, which includes your premiums from health insurance that is more than 7.5% of your AGI for the 2020 tax year.



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