Financial Focus: Tax Season 2021 - Time to apply Children Deductions & Credits

By Professor Anthony Rivieccio MBA PFA

As a non parent ( sadly) I can not relate to all the joy parents get, as they enjoy 18 years of bliss, headache, heartache, unconditional love and thinking of packing their bags at least, twice ( I was a child though lol) but in regards to taxes: they are a joy, a headache and a tax time goldmine

There are several tax benefits regarding children and their residency, dependency and the liberties that PARENTS can receive in their tax refund for all the wonderful bliss and headaches they have received through the tax year

Child Tax Credit

Under the current tax law, an individual taxpayer generally can claim a maximum child tax credit of $2,000 for each qualifying child under age 17 (Code Sec. 24(h)(2)). For lower income taxpayers, the child tax credit is generally partially refundable to the extent of 15% of earned income above $3,000 up to $1,400 per child (Code Sec.24(h)(5)).

For higher income taxpayers, the credit is phased out if income exceeds $400,000 on a joint return or $200,00 on another return (Code Sec. 24(h)(3))Special rules for 2021. In response to the COVID-19 pandemic, the American Rescue Plan Act expanded the child tax credit for 2021 (Code Sec. 24(i)).

The amount of the credit was increased from $2,000 per child to $3,600 for children under age 6 as of the close of the tax year and to $3,000 for other qualifying children. In addition, the definition of a qualifying child was temporarily broadened to include a child who has not turned age 18 by the end of 2021.

The expanded credit is subject to a phase out for taxpayers with incomes above $75,000 for singles, $112,5000 for heads of households and $150,000 for joint filers.

Child and Dependent Care Tax Credit

A taxpayer can claim an income tax credit for child and dependent care expenses for a qualifying individual that allow the taxpayer to be gainfully employed or to actively search for gainful employment (Code Sec. 21). Under general tax law rules, the credit is nonrefundable.

A qualifying individual is:

• A dependent child under age 13;

• a dependent who is physically or mentally incapable of self-care and who has the principal place of abode as the taxpayer for more than one-half the tax year or the taxpayer’s spouse who is physically or mentally incapable of self-care and who has the principal place of abode as the taxpayer for more than one-half the tax year.

The credit is 35% of employment-related expenses incurred by taxpayers with adjusted gross income (AGI) of $15,000 or less. The percentage decreases by 1% for each $2,000 (or fraction of that amount) of AGI over $15,000, but not below 20%. Thus, for taxpayers with AGI over $43,000, the applicable percentage is 20%.

Dependent Care Assistance

The tax law provides an exclusion from gross income for amounts provided to an employee under an employer’s dependent care assistance program (DCAP).

(Code Sec. 129) Under longstanding rules, up to $5,000 ($2,500 if the employee is married and files a separate return) of employer-provided dependent care assistance can be excluded from an employee’s income each year. However, the exclusion cannot exceed the employee’s earned income or, for married employees, the earned income of the lower

earning spouse. As with the child and dependent care credit, a spouse who is incapacitated or who is a full-time student for at least five months during the calendar year is treated as having earned income of not less than $250 per month if there is one qualifying dependent and not less than $500 per month if there are two or more qualifying dependents. The maximum exclusion is not, however, limited based on adjusted gross income.

Amounts excluded from income are not subject to Social Security and Medicare (FICA) tax, federal unemployment (FUTA) tax, or federal income tax withholding.

Qualified Tuition Programs

A Qualified Tuition Program(QTP)—also known as a Section 529 Plan—allows funds to be set aside either to prepay or contribute to an account for payment of child’s qualified education expenses (Code Sec. 529). QTPs are set up and maintained either by states or by eligible educational institutions. However, plans established by educational institutions can only provide for prepayments of a child’s expenses. In the case of prepayments, the child will be entitled to a waiver or payment of his or her expenses at that institution.

Contributions to a QTP are not deductible for federal income tax purposes. However, distributions from a QTP are not taxable so long as the distribution does not exceed the QTP beneficiary’s adjusted qualified education expenses. Thus, earnings on QTP contributions grow and compound tax-free. Contributors should bear in mind, however, that investment options in a QTP may be limited.

Education Tax Credits

The tax law provides two tax credits to offset the cost of higher education: the American Opportunity Credit and the Lifetime Learning Credit (Code Sec. 25A).American Opportunity Credit. The American Opportunity Credit can be claimed for the first four years of an eligible student’s post-secondary education. An eligible student may be the taxpayer, the taxpayer’s spouse or a dependent claimed on the taxpayer’s return.

The credit is allowed for a year if the student was en-rolled for at least one academic period in a program leading to a degree, certificate, or other recognized academic credential and carried at least one-half the normal workload for his or her course of study. As a general rule, the credit can be claimed for each of a student’s freshman through senior years of college. However, if a student takes more than four years to graduate, the credit can be claimed only for the first four years of attendance.

There are many ” tax strategies” and ” special new notices” regarding these benefits that you should double check or talk to your tax preparer about.

I don’t have children, but I have many Clients that do—- and boy do they really love their children and their tax preparer during this time of year.

If you would like a free copy of ” Tax Strategies for Families with Children” from one of our colleagues,Intuit Accountants, who go over these areas in more detail, please feel free to email or give us a call

Professor Anthony Rivieccio, MBA PFA, is the founder of The Financial Advisors Group, celebrating its 25th year as a full service financial planning & investment firm . Anthony is also owner of Rivieccio Financial Advisors, a virtual only financial advisory firm, opened in 2021.

Mr. Rivieccio, a recognized financial expert since 1986, has been featured by many national and local media including: Kiplinger’s Personal Finance, The New York Post, News 12 The Bronx, Bloomberg News Radio, BronxNet Television, the Norwood News, The West Side Manhattan Gazette, Labor Press Magazine, Financial Planning Magazine, WINS 1010 Radio, The Co-Op City News, The New York Parrot, The Bronx News, thisisthebronX.info , The Bronx Chronicle & The Parkchester Times. Mr. Rivieccio also pens a financial article called “Money Talk”.

Anthony is also currently an Adjunct Professor of Business, Finance & Accounting for both, City University of New York & Monroe College, a Private University. To learn about our new Personal Finance internet streaming platform, FinancialFocus+, filled with FREE; financial & market News, ” how to” videos, Broadcast TV & Educational Webinars, just call or email for a brochure.

For financial assistance, Anthony can be reached at (347) 575-5045. Have Facebook? My email is a_rivieccio@yahoo.com My personal page is www.facebook.com/anthonyfromthebronx