Top Six Tax Mistakes Parents Make

January 15, 2018

Your children might put a nice little dent in your bank account from time to time, but during tax season, they might make that bank account grow. Tax season is the one time of year when your kids can actually put more dough in your pockets, thanks to some parent-friendly deductions and credits. The bad news is that it’s easy to miss tax breaks that could save you serious cash. It’s not as straightforward as one might think. There are a variety of factors that will determine how you file, including the size of your family, children’s age, marital status, among other things. The good news is that we are here to help! Take a look at the top six most common, and costly, mistakes that parents at tax time, and make sure you’re not making them, too!

Wrongly Claiming Dependents

The first on our list is wrongly claiming dependents. This one applies mostly to single parents, or couples who file separately. If you are co-parenting, this is something you need to talk about with the other parent before you file. Only one parent is allowed to claim a dependent each year if you file separately or are a single parent. Generally, the parent with primary custody of a child the majority of the year is the one to claim his or her child as the dependent.

There is an exception to this rule. If the custodial parent signs a waiver foregoing their right to claim the dependent, the non-custodial parent can claim their child as a dependent. If a parent wrongly claims a child, they'll receive a notice from the taxing authority adjusting their tax return to add back all of the benefits linked to claiming the child. Not only that but interest and potential penalties on the tax due will be imposed. So make sure you are discussing with the other parent so no lines get crossed.

Wrongly Claiming Head of Household

Filing head of household is something you don't want to get wrong. Seems simple enough, right? Wrong. Just because you might think that you're the head of your household you should claim 'head of household' on your taxes. Be cautious, because that might not be the case. If it’s not the case, a penalty of approximately $500 is enforced for each failure to meet these requirements.

Beginning in 2018, the Tax Cuts and Jobs Act expands the due diligence requirements for paid preparers to cover determining eligibility for a taxpayer to file as head of household.

So what are the requirements?

1. Must be unmarried (or considered unmarried on the last day of the tax year);

2. Must have paid over half the costs of keeping up a home for the year;

3. Must have a qualifying person (someone you financially support) living in your home with you for over half the year.

If you fail to prove that you fit any of the requirements above, it can be costly, so be cautious.

Not Claiming the Child Tax Credit

This tax season, the rules around Child Tax Credit might be particularly confusing for parents, as the new tax bill included some changes in this area. The first big change is child tax credit doubled from $1,000 to $2,000. Along with the tax credit increase, exemptions were eliminated, meaning that more of parents’ income will be taxable than before.

While the exemptions might be discouraging, make sure you still claim those credits this tax season, because they could still save you money. The child tax credit is reduced or eliminated only if your adjusted gross income is above certain thresholds. What this means is that the credit amount is reduced by $50 for each $1,000 (or fraction thereof) by which the taxpayer's modified adjusted gross income exceeds the threshold amount.

Wondering what those threshold amounts are? We’ve listed them below for you:

· $110,000 on a joint return

· $75,000 for an unmarried individual

· $55,000 for a married individual filing a separate return

So if you have a child that is aged 17 or under, make sure you’re not missing out! And don’t forget, you can even use it for step-children, adopted children, and foster children, as long as they lived with you for six months or more within the year.

Not Getting a Social Security Number for Newborns

The IRS is probably the last thing on your mind after your precious baby enters into the world, but it should be on your checklist to get his or her new social security number established before tax season begins. Luckily, the hospital staff typically makes it easier for you by providing the necessary paperwork. It’s up t you to fill it out and send it in. If you don’t send in the completed paperwork in time for tax season, it is possible that the IRS could disallow some tax benefits.

Regardless of when your baby was born within the year, even if it was right up to the wire, the parent still may be eligible for an entire year’s worth of exemption status.

Not Using the Child Care Credit

As we all know, daycare facilities, nannys’, or other forms of child care for your child can be very expensive. Fortunately, the Child Care Credit can help alleviate some of the expenses. As long as you have a dependent under the age of 13 – or a dependent who’s physically or mentally disabled – you qualify for the Child Care Credit.

The IRS rules state that the credit is worth between 20 and 35 percent of the first $3,000 of expenses for one child, or up to $6,000 for two or more children. The percentage you can claim is determined by your adjusted gross income (AGI).

Keep in mind that you don’t need to send your child to daycare to qualify for the Child Care Credit. You are also able to claim a credit for day camp, preschool, and the costs of a babysitter. Of course, to claim the credit, you will need to provide the proper documentation. So make sure to keep careful records and have the provider’s tax ID or Social Security number on file.

Not Understanding the Kiddie Tax

The Kiddie tax refers to the tax on a child's investment or other "unearned income" (i.e. an inheritance, award money, etc.). One common mistake parents make is grouping their child’s investment income as a part of their own income. Never report your child’s wage income on your own tax return. By doing so, your AGI will be higher and it can put you in a higher tax bracket, ultimately meaning you will pay in more to the IRS.

So there you have it, the top six tax mistakes we tend to see the most. The easiest way to avoid any tax mistakes is to let a tax expert handle them! That is where we come in! We can take care of your entire family’s taxes, so you can sit back and relax while we do all of the work. To chat more about our tax services, simply fill out the contact form on the Contact Us page, give us a call at (906) 774-4051, or email us at solutions@f-ccpa.com. We're happy to help you with your tax needs!