Raising a Family on a Middle-Class Income? Do This Before You File Your Taxes
Like many Americans, you’re raising a family on a middle-class income. Though you’re rich in love, you’re strategic about every aspect of your finances — and your taxes are no exception. When every penny matters, a little upfront planning can help you save as much as possible before you file.
MoneyLion spoke with Elisabella Ricca, a consumer analyst at TopCashback, to learn what families earning a middle-class income should do before filing their taxes. Spoiler alert: One of the best things you can do is understand which tax credits and deductions you may qualify for.
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Study Up on Tax Credits
Before you sit down at your laptop or visit your accountant, Ricca recommends learning more about some of the most common — and commonly missed — tax credits that can lower your tax bill dollar for dollar.
“Middle-class households should know about tax credits like the Child Tax Credit, the Child and Dependent Care Credit, the Earned Income Tax Credit, the American Opportunity Tax Credit and the Saver’s Credit,” she said. “The most commonly overlooked ones are the Saver’s Credit and the Child and Dependent Care Credit.”
There’s plenty of information about these credits online, including on the IRS website. As you research, focus on how each credit works, who qualifies and whether it’s refundable or nonrefundable. If you’re working with a tax preparer, ask what you might be eligible for — you may be surprised.
Get Very Familiar With the Child Tax Credit
One of the most valuable credits for middle-class families is the Child Tax Credit (CTC), so it’s no wonder Ricca wants you to get very familiar with it.
She explains that the CTC is worth up to $2,200 per qualifying child under age 17 who lives with you for more than half the year. Up to $1,700 of that amount may be refundable through the Additional Child Tax Credit, depending on your income, while the remainder is nonrefundable.
What you receive depends on your earned income and filing status — and Ricca notes that the credit begins phasing out at $200,000 for single filers and $400,000 for married couples filing jointly. To qualify, each child must have a valid Social Security number, and at least one parent must have one as well.
Think you don’t qualify because you’re not a biological parent? Don’t be so sure. This is why Ricca encourages you to explore the CTC more closely.
“It’s not just parents who can claim the credit,” she said. “Other relatives, such as grandparents or stepparents, may be able to claim it if they meet IRS requirements.”
Learn the Differences Between the Child Tax Credit and the Child and Dependent Care Credit
Though the Child Tax Credit (CTC) and Child and Dependent Care Credit (CDCTC) may sound similar, they have important differences. Understanding them can be key to maximizing your tax savings.
Let Ricca break it down:
“The CTC helps families reduce their tax liability and is partially refundable,” she said. “The CDCTC, on the other hand, is a nonrefundable credit that helps working parents pay for child care so they can work or look for work.”
Unlike the CTC, the CDCTC is based on eligible child care expenses, not the number of children you have. The credit can cover a percentage of qualifying expenses, up to $3,000 for one child or $6,000 for two or more children, depending on your income.
The good news? If you meet the eligibility requirements for both credits, you can claim both, as long as you don’t use the same expenses to qualify twice.
Get Your Documents Together
As you’re learning more about relevant credits and deductions, Ricca also advises gathering all your key tax documents, including:
W-2s
1099s
Investment income statements
Dependent information, including Social Security numbers
Records of deductible expenses
“TaxAct has a helpful tax preparation checklist to guide you through filing Form 1040,” she said. “Certain decisions must be made before filing and can’t be changed afterward, including choosing your filing status and deciding between itemizing or taking the standard deduction.”
When deciding between itemized deductions and the standard deduction, Ricca suggests choosing whichever is higher. For many middle-class families, the standard deduction makes the most sense — it’s simpler and often results in a larger deduction.
The Bottom Line
Raising a family on a middle-class income isn’t always easy. But if you take the time before filing to understand the credits and deductions that can help you keep more money in your pocket, tax season doesn’t have to feel quite so tough.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal, or tax advice.
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