Should the child tax credit be eliminated

What is an addict?

It is important to understand who is and who is not dependent on your taxes. Simply put, a loved one is a relative who you gave significant financial assistance to during the tax year. There are several other criteria that must be met in order to be able to claim them on your tax return. However, doing so can save you thousands of dollars a year.

Depending on who you are caring for, your tax bill can change drastically, especially for larger families or those caring for aging relatives. Let's summarize who exactly qualifies as a dependent, how you can claim them in your tax returns, and the challenges involved.

What is an addict?

An addict is someone who relies on you for financial support, either because they are a child or because they are an elderly relative who cannot maintain substantial employment. There are two official types of dependents: qualified children and qualified relatives.

Types of addicts

In order to claim a dependent, the Internal Revenue Service (IRS) must meet a number of criteria.

For a qualified child:

  • The person must be one of the following: your son or daughter, your stepchild, your foster child, your brother or sister, your half-brother or half-sister, your step-brother or sister, or a descendant of any of them.
  • Your child must be younger than you and either younger than 19 or a full-time student under 24 by the end of the calendar year.
  • Your child must live with you for at least six months, with a few exceptions, including military service or children of parents who are separated.
  • You must have financially supported the person for more than half of the year.
  • You have to be the only person claiming it.

If your child is permanently and completely disabled, there is no age limit.

For a qualified relative:

  • Your relative must have lived with you all year unless they are listed as an exception according to the IRS.
  • For the 2020 tax year, which is due to be filed in 2021, the income limit is $ 4,300.
  • You must provide more than half of the individual's total financial assistance for the year.
  • You have to be the only person claiming it.

In addition to the above criteria, there are three additional tests for those claiming a dependent:

  • Dependency taxpayer test: If you can be claimed as someone else's dependents, you may not claim any dependents yourself.
  • Common return test: You cannot claim a married person as a dependent if they file a joint tax return. An exception applies if this tax return is only used to reclaim income paid or estimated tax.
  • Citizen or resident test: The individual you are claiming must be a US citizen, US resident, US citizen, or resident of Mexico or Canada (with the exception of some adopted children).

How addicts work

The purpose of entitlement to a dependent is to provide taxpayers with financial relief. This was created in 1954 with Section 151 of the IRS Tax Act and the introduction of personal exemptions, claiming a dependent increases the number of exemptions you are entitled to and thus the amount of income that you are taxed on.

With the signing of the Tax Cut and Jobs Act (TCJA) in 2017, personal exemptions were eliminated with effect from 2018 to 2025. In their place, standard deductions were almost doubled, tax credits were certainly increased and new credits were created. These credits include, among other things, the tax credit for children and the credit for other dependents, as well as the credit for children and people in need of care.

Eligibility requirements vary for all credits, but taken together they can cut your tax burden significantly - or even allow a refund if you don't owe tax. The IRS has a digital tool that can help you determine if your child qualifies for the Child Tax Credit or the Other Dependent Tax Credit.

Do you have to claim dependents from your taxes?

In general, it is not mandatory to claim relatives on your tax return. However, in general, this is a good idea as you are eligible for thousands of dollars in tax credits. If you don't add them to your returns, you're leaving money on the table every year.

At higher income levels, multiple loans expire and you may not see much of a benefit on your taxes. For example, the child tax credit expires and begins to dwindle when income increases above $ 400,000 for joint returns or above $ 200,000 for individual and household heads.

Pros and Cons of Taking Dependencies on Your Taxes

advantages
    • Adding a dependent can lower your overall tax burden
    • Some credits are refundable
disadvantage
    • Claiming a dependent prevents them from filing their own tax return
    • If your income is too high, you are unlikely to see much benefit

Advantages explained

  • Adding a dependent can lower your overall tax burden. Because the government offers a number of different tax credits for loved ones, you may be able to lower the amount of tax you owe each year.
  • Some credits are refundable. If a tax credit is refundable, it means that the IRS will pay you the credit even if you've cleared your tax bill.

The loan for children and people in need of care is a non-refundable loan that can only be claimed by taxpayers with taxable income.

Disadvantages explained

  • Claiming a dependent prevents them from filing their own tax return. In some cases, someone may find it more beneficial to submit their own return. For example, if you have an 18 year old daughter with a full-time job, she might get more cash by filing a return instead of being claimed by yours.
  • If your income is too high, you may not see much benefit. Since many loans are income based and expire at higher levels, adding an amount of tax to your taxes may not be very beneficial.

Effects of Tax Reform on Allowances

Before the tax code reform in 2017, employees were able to adjust their withholding tax on their Form W-4. This was intended to change how much income tax an employer withholds from your check. You could take advantage of children and other dependents to reduce the amount of tax withheld. This will increase your take-away pay and, if applicable, reduce the refund you would get at the end of the year.

Current tax legislation has eliminated these allowances in favor of a higher standard deduction and child tax credit, as noted above. However, with the current iteration of the W-4, you can still calculate and thus claim children and dependents. Instead of an exception, you will now receive a credit.

When completing your W-4, simply complete “Step 3: Eligibility.” If you are eligible for Child Tax Credit or other dependent credits, less income tax will be withheld from your paycheck. This replaces the credit for a refund when you file your taxes.

The central theses

  • An addict is a relative whom you provide significant financial support for.
  • Dependents must pass a series of tests to be eligible on their tax return.
  • By adding a dependent on your tax return, you can receive significant tax credits.