Tax filing as a family can be challenging. Adding children, a spouse, or other dependents into the mix can make the process even more complex. Fortunately, the Internal Revenue Code includes several provisions designed to benefit parents and spouses. Understanding these provisions, from filing statuses to claiming dependents, is the first step in optimizing your tax return.
Read: Tax 101: Basics You Need to Understand
Choosing Your Filing Status
Your filing status is a critical component of your tax return and can significantly impact how much you owe or receive as a refund. There are five filing statuses to choose from, each with its own qualifications and benefits. The right choice can affect your standard deduction and eligibility for various tax credits and deductions.
Married Filing Jointly
You can file a joint return with your spouse if you’re married and living together. Even if you’re not living together at the end of the tax year but haven’t legally separated or divorced, you may still qualify for this status. Joint filers often benefit from higher income thresholds for tax breaks, which can reduce taxable income significantly.
However, filing jointly means both spouses are “jointly and individually liable” for any taxes due. This means you are both responsible for the entire tax amount, even if one spouse earned all the income. Additionally, if your spouse owes debts like child support or previous tax debts, your joint refund can be used to pay those debts.
Married Filing Separately
Choosing this status can protect you from being liable for your spouse’s tax and debt obligations. However, it comes with drawbacks, such as losing eligibility for certain tax credits like the adoption tax credit, educational credits, and the child and dependent care tax credit. While you only pay taxes on your income, you may miss out on several tax benefits.
Head of Household
This status is beneficial for single or separated individuals with dependents. To qualify, you must be unmarried, have paid more than 50% of the household expenses, and have a qualifying dependent living with you for more than half the year. This status allows for higher income thresholds and more favorable tax rates than the single filing status.
Qualifying Widow(er) with Dependent Child
This status is available if your spouse died within the past two years and you have a dependent child. It offers tax benefits similar to those of the married filing jointly status for a limited time, providing some financial relief during a difficult period.
Single Filer
If you’re unmarried and do not have any dependents or do not pay more than half of household expenses, you will likely file as a single filer. This status offers fewer tax benefits compared to the head of household or married filing jointly statuses.
Money-Saving Tax Tips for Families
Numerous tax credits are available that can help reduce your tax liability, especially if you have children or other dependents. These credits often come with specific eligibility requirements and income limits.
Earned Income Tax Credit (EITC)
The EITC provides financial assistance to low-income taxpayers by reducing the amount of tax owed. The credit amount depends on your income, filing status, and number of dependents. For 2023, the maximum income ranges from $17,640 (no dependents) to $63,398 (three or more dependents) for married joint filers. The credit can range from $600 to $7,430, and if the credit exceeds your tax liability, you might receive a refund.
Child Tax Credit
The Child Tax Credit helps parents cover the costs of raising children. You can claim up to $2,000 per qualifying child under 17, with up to $1,600 being refundable. The credit phases out for single filers earning above $200,000 and joint filers earning above $400,000.
Child and Dependent Care Credit
This credit is for working parents who pay for childcare. The credit amount is a percentage of the childcare expenses, decreasing as income increases. Eligible expenses must be for the care of children under 13 or other dependents incapable of self-care. The maximum credit was $3,000 for one child/dependent or $6,000 for two or more children/dependents in the 2022 tax year.
Adoption Tax Credit
Adoptive parents can benefit from this credit, which covers qualifying adoption expenses. You can also exclude any employer-provided adoption assistance from your income. The credit can be carried forward if it exceeds your tax liability for the current year. Income limits apply, but they are quite generous.
Preparing for Tax Season
When it comes to tax filing as a family, it’s critical to prepare and coordinate well in advance, particularly if you’re sharing custody or financial responsibilities with another parent or spouse. Make sure to discuss who will claim the children and the associated tax credits to prevent any disputes and potential audits. The IRS employs “tiebreaker” rules to determine dependent status, usually favoring the parent with whom the child spent the majority of the tax year.