Tax prep 101: how to make the most out of your return
As tax season approaches, families will be looking for tips on how to best maximize benefits. We reached out to Jim Moran, CPA, MST, and manager at Melanson Heath, a regional CPA firm with offices in New Hampshire, Maine and Massachusetts, to help us learn how to do just that.
What are the benefits of using a CPA to prepare your taxes?
Moran: “The U.S. Tax Code has approximately 76,000 pages of rules, rulings, regulations and case law to interpret. A CPA can help a taxpayer navigate these rules to minimize a taxpayer’s liability. In addition to preparing the tax return, a CPA can help during the year with planning for tax withholding and provide tax-efficient savings for retirement and college. CPAs provide the human touch to taxes. Finally, savings realized by using a CPA often cover or exceed any fees they may charge.”
What tax credits are available to families with children?
Moran: “There are several credits available to families with children. A credit is more valuable than a deduction as it is a dollar-for-dollar reduction in tax while a deduction only lowers the overall amount of taxable income. Sometimes a credit maybe refundable.
Child Tax Credit: For 2019, the Child Tax Credit (CTC) is $2,000 per qualifying child. The credit applies if the child is younger than 17 at the end of the year, the taxpayer claims the child as a dependent, and the child lives with the taxpayer for more than six months of the year. The qualifying child must also have a valid Social Security Number before the due date of the tax return, including extensions.
Dependents who do not qualify for the CTC may qualify for the Credit for Other Dependents (ODC) of $500 per individual. A person qualifies if they meet all the following conditions:
- The person is claimed as a dependent on your return
- Is not being used by you to claim the CTC or ACTC
- Is a U.S. citizen, U.S. national, or resident alien
The credit begins to phase out at $200,000 of modified adjusted gross income, or $400,000 for married couples filing jointly.
Up to $1,400 of the credit can be refundable for each child. This means a taxpayer may get a refund even if they don’t owe any tax.
Additional Child Tax Credit (ACTC): This credit is for certain individuals who got less than the full amount of the CTC in cases where the credit exceeded the amount of taxes due. The ACTC may give you a refund even if you do not owe any tax.
Credit for child and dependent care expenses: To be able to claim the credit for child and dependent care expenses, you must file Form 1040 or Form 1040NR, and meet all the tests below:
- Qualifying Person Test. A qualifying person is:
- Your child who is your dependent and under age 13 when the care was provided;
- A spouse who was unable to physically or mentally care for themself and lived with you for more than half the year; or
- A person who was physically or mentally unable to care for themself, lived with you for more than half the year, and either:
- Was your dependent, or
- Would have been your dependent except that the person received gross income of $4,150 or more, filed a joint return or you or your spouse can be claimed as a dependent on someone else’s 2019 return.
- Earned Income Test. You (and your spouse if filing jointly) must have earned income during the year.
- Work-Related Expense Test. You and your spouse must have paid child or dependent care expenses so you can work or look for work.
- You must make payments for child and dependent care to someone you (and your spouse) can’t claim as a dependent. If you make payments to your child, he or she can’t be your dependent and must be age 19 or older by the end of the year. You can’t make payments to:
- Your spouse or
- The parent of your qualifying person if your qualifying person is your child and under age 13.
- Joint Return Test. Your filing status may be single, head of household, or qualifying widow(er) with dependent child. If married, you must file a joint return, unless an exception applies.
- Provider Identification Test. You must identify the care provider on your tax return.
- If you exclude or deduct dependent care benefits provided by a dependent care benefit plan, the total amount you exclude or deduct must be less than the dollar limit for qualifying expenses (generally, $3,000 if one qualifying person was cared for or $6,000 if two or more qualifying persons were cared for). (If two or more qualifying persons were cared for, the amount you exclude or deduct will always be less than the dollar limit because the total amount you can exclude or deduct is limited to $5,000.
In addition to the above there are also several educational credits available to parents with children in college.”