Tax Deductions and Credits All Parents Should Know
Tax season is here. How prepared are you? Today we'll go over how to make your taxes easier and less stressful!
Tax Season: A Busy Parents Guide on How to Prepare
It's that time of year again.
Yup. It's tax season.
Between the paperwork you need to track tax terms that are a bit dry, in the eye opening nature of going through your finances for the year. Taxes can understandably make you anxious.
If you're looking to optimize your finances, you have to get your taxes done. Right.
Today. I want to give you a quick and easy guide on preparing for your taxes.
In this episode, we're going to:
- take a step back and look at the essentials of how taxes work
- Examine the tax deductions and credits that parents should know about
- examine ways you can plan and set yourselves up for big wins on next year's taxes
Are you ready? Let's get started!
Resources to Tackle Your Taxes
Looking to make taxes less stressful? Here are some of my favorite resources!
- Best Budget and Money Apps: Personal Capital, Tiller, Mint
- TurboTax <— We use them for our taxes
- Free 401(k) Analysis: blooom
- Jumpstart Your Marriage and Your Money
- Mastering Your Taxes This Year
- How to Tackle Your Taxes Like a Pro and Maximize Your Refund
If you’d like to chat more your money system, please join us in our private and free Facebook group – Thriving Families.
We’re families looking to support and help one another out.
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How Tax Credits, Deductions, Rates Work
Before we get into tax deductions and credits to look out for let's quickly go over how taxes work here in the United States. So we have a progressive tax system.
This basically means that your income is taxed at different rates, depending on how much you made. Currently, there are seven different tax brackets with tax rates ranging from. 10% to 37%.
The amount you owe for taxes is based on your income and your filing status. So, let me give you an example. Let's say we have a family where the couple is married and they're filing jointly. Their household income is 175,000. While their income puts them in the 24% bracket that does not mean their entire income is taxed at that rate.
Anything over 171,000 would be, but there first, I think it's like 19,700 something would be taxed at 10%.
From that point to about 80,000, it would be taxed at 12%. And then from 80,000 to 171,000, that would be taxed at 22%.
As you can see that progressive only gets higher. But their effective tax rate.
That percentage of income that they're actually paying is going to be lower than 24%.
Generally people are looking for ways to lower their tax bill.
And there's two ways to approach that, depending on your circumstances, you can qualify for various tax deductions and credits.
I know those two are usually grouped together but there are differences.
Tax deductions, reduce your taxable income.
Tax credits on the other hand, lower your tax bill.
We'll get into the different deductions and credits that you may qualify for, but it's important to see how these affect your taxes.
You want to take advantage of these legitimate ways to lower your taxable income and tax bill!
Maximizing your Tax Benefits as Parents
Right now you're probably having your tax forms sent to you, whether it's through email or regular postal service.
It's key that you keep these forums in a safe place, because you're going to need them when you follow your taxes.
One question I get from families is deciding whether or not they should itemize or take the standard deduction.
The quick answer is you want to take that option that gives you the bigger deduction.
A few years ago, the standard deduction jumped significantly so that most families would benefit taking the standard deduction.
For the 2020 tax year, the standard deduction for single or married filing separately is 12,400 head of household is 18,650. In married, filing jointly or qualifying widower. Is $24,800.
However it doesn't hurt to go through and run the numbers.
If you have a tax professional or using software, it is fairly easy to run the numbers in both cases so that you have them in front of you it can make the best decision.
There's no way I can hit every single tax deduction and credit that you qualify for and keep this podcast short. But there are some essential ones parents should know about.
Let's start off with kids.
Raising kids can be personally fulfilling. But there are some financial benefits as well.
For example, there is the child tax credit. That if you have a qualifying child under 17. You may be able to claim it, which is right now $2,000.
With daycare being a huge expense for many parents. You may also want to look at the dependent care credit.
It's based on a percentage of how much you pay for childcare
For families who meet the income limits, the earned income credit can be a wonderful help. Because it can lower your taxes owed. And you may qualify for a refund.
If you adopted, look into the adoption tax credit. Some of your expenses like attorney and court fees may be offset by this credit.
And if you work at a company, there may be some workplace benefits that can give you a significant boost when it comes to your taxes and finances.
One example is your 401k contributions. They are exempt from federal state and local income tax. And because you are contributing your pre-tax money. You're decreasing your total taxable income for the year.
Understandably healthcare can seem pricey, especially with families. But there are some ways that you can save money now. And with your taxes.
If you have a high deductible health plan and health savings account, this can be a huge win.
For one, your contributions to the account are tax-free. If it earns interest or you're investing that grows, tax-free. And when you withdraw the money, it's federally tax-free for qualified medical expenses.
If you don't have a high deductible health plan, there's still a way for you to save. If you have a flexible spending account. This can also reduce your taxable income because your contributions go in their pre-tax.
That money can be used for your health-related expenses. The difference here is that you have to use it, or you will lose it every year.
So you do have to calculate how much money you want to set aside each year and make sure that you spend all of that.
Another investment vehicle that can give you some tax advantages is an IRA. Now with a traditional IRA, you're money is going in their pre-tax. So that's lowering your taxable income. You can invest in a roth ira but the difference here is that the tax benefits come when you withdraw.
If you own a home, you might want to look at deducting mortgage interest. There's also your student loans and for tax credits, higher education tax credits, like the American opportunity or the lifetime learning.
Again, I can't give you a review of every single tax credit or deduction, but I wanted to give you some key ones to look out for when you file your taxes.
Planning for Next Tax Season
We tend to think of tax season as between January and April, but you can have some big ones by approaching it bit by bit throughout the year.
When we were going over some of the deductions, you may have noticed that your workplace can give you some great benefits.
Usually doing open enrollment in the fall time, you can make some choices with your healthcare insurance and accounts like your health savings account or flexible spending accounts.
Even though a lot of people I know wait until open enrollment to review their 401k, you don't have to wait for that time of year. If there's a better time where you can sit down and just review and make sure that your contributions and investments are aligned with your goals and your timelines then that is a huge one.
Finally, there's one area where I feel like a lot of families are leaving some money on the table. Which is reviewing and making sure that your withholdings are correct for your paychecks.
It may have been awhile and in some cases, not since you were first hired that you had looked at your w four.
If that's the case then you may want to review and just make sure that the numbers make sense.
If year after year, you keep getting a significant tax refund, then this may be a case where you withholding too much throughout the year.
You can have more money in your pocket now. Instead of waiting until the next tax season.
If you're looking for more ways to optimize your finances throughout the year, please check out the show notes.
I'll have a list of different episodes. We even have a series just about open enrollment. But if you had to listen to just one show, please check out my interview with Matt minor. He's a fee only fiduciary advisor who specializes in helping families make sure that their finances online with their goals, priorities and values.
In that show, we get into some key in financially impactful portions of your benefit plans so that you can make the most out of it.
I want you to feel empowered when it comes to your finances and make sure that you feel comfortable with taxes!
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