Replacing lost tax breaks for your growing children

Child Tax Credits for 2021 Gift ReturnYour children are getting older. They’ll soon be dating, driving, and starting college, if they haven’t already begun. Unfortunately, as your children grow, your tax benefits drastically decrease. Still, you can compensate for the losses with timely tax planning. Depending on the age of your child, take into account the following tax credits:

Dependent daycare credit

Age 13: No dependent child care credits. When your adjusted gross income reaches $43,000, you are typically eligible for a minimum yearly credit of $600 for one kid and $1,200 for two or more for the expense of child care while you and your spouse are both working. However, the credit is only available to children under 13.

Tax strategy: Hire your teenager to work for your company now that they are adults. The child will typically have little to no income tax due on the wages and may even be eligible for a withholding exemption.

Child tax credits

Age 17: Child Tax Credit (CTC) is no longer accessible beyond 17. Each child gets a $2,000 credit from the CTC, of which $1,600 is refundable. Sadly, the credit is lost once the child turns 17. Remember that tax credits reduce your tax liability dollar for dollar. Therefore, as soon as each child turns 17, your taxes will increase by the total amount of the credit you previously claimed.

Tax strategy: Claim a $500 nonrefundable credit for a dependent who isn’t a CTC-eligible child. Parents of college and high school seniors frequently have access to this.

Kiddie tax

Age 19 or 24: Say goodbye to the kiddie tax. Now for some positive news. If your child is not enrolled full-time in school at age 19, kiddie tax regulations no longer apply to them. If so, they continue to be eligible for another four years or until they are 24. This implies that any unearned income, such as interest and dividends, beyond the yearly cap ($2,300 in 2023) is no longer subject to the parent’s (often higher) tax rate.

Tax strategy: It could be time for a planning session now that your child is no longer subject to the kiddie tax. Children can now sell long-held assets with capital gains with little to no federal tax liability.

Remember to prepare for changes to your tax situation as you observe your children mature and start to become independent. To organize a planning session to discuss other tax benefits you might be eligible for, or if you have any concerns regarding these child tax breaks, please contact our RRBB accountants and advisors.


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