By Edward “Ed” V. O’Neal, Vice President and Manager, Retirement Plans

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If you are a parent of young children, teenagers or other dependents, tax season can often be a frustrating exercise of trying to understand and effectively utilize key tax credits and deductions.  Additionally, the recent enactment of the Tax Cuts and Jobs Act (TCJA), which became effective on January 1, 2018, could have an impact on the tax planning strategies for many parents and families.  Here are a few items from TCJA that could be important to tax planning for parents:

  1. TCJA included significant changes to tax deductions, tax credits, personal exemptions and individual income tax rates. While the standard deduction was doubled, and income tax rates were generally lowered, personal exemptions and most itemized deductions have been eliminated – including the popular exemption for dependents often used by parents.
  2. There continue to be a number of tax credits for parents which can lower your tax bill dollar-for-dollar, with the more popular ones including:
    • Child Tax Credit for families with children under the age of 17 and meeting certain household income levels. This tax credit received a significant expansion under TCJA increasing the maximum credit amount to $2,000 per child (up from $1,000 in 2017).
      1. TCJA also established a new tax credit of up to $500 for dependents who do not meet the Child Tax Credit definition of a qualified child (i.e. under the age of 17).  Under previous law, no credit was available for dependent children who were age 17 or older.
  • Child & Dependent Care Credit for parents requiring child care so that they can work (or look for work). This credit applies for children under the age of 13 and will allow parents to claim a credit up to 35% of qualified care expenses (with a maximum of $3,000 in care expenses for parents with one dependent and $6,000 for parents with more than one dependent). The credit is also based on parent income levels.
  • The Adoption Tax Credit can help parents offset some of the cost associated with child adoption. For adoptions finalized in 2018, the amount of the credit is up to $13,810 per child.
  • Higher Education Tax Credits (such as the American Opportunity Tax Credit and Lifetime Learning Credit) can help parents offset some of the expenses for higher education for their children. Both tax credits have income limitations to qualify.
  1. Though tax deductions and exemptions have been limited under TCJA, there are still a few options available that could help parents reduce taxable income, including:
  • Donations of all those cute baby outfits that your child barely wore or has now outgrown, along with unused/old toys or baby furniture can all add up to nice-sized deductions as a charitable donation. Websites like Goodwill.org can help you estimate the fair market value of these items.
  • Student Loan Interest Deduction which permits parents to deduct interest payments on certain student loans.

Changes created with the TCJA will require parents and families to rethink their tax planning strategies for 2018, with careful consideration of the new tax rates, enhanced standard deductions, new limits on exemptions, and the impact of key tax credits on your ultimate tax obligation.

Benjamin F. Edwards & Co. does not provide tax advice. Please consult with your tax advisor before implementing any tax strategy to fully understand the qualification requirements and impact on your personal tax situation for 2018 and beyond.