Determining Your Family Tax Benefits
Supporting children in college while also providing financial
support for elderly relatives is commonplace today. If you
are a source of support for others, be sure to review and
understand all family deductions and credits that you may
claim this year.
The dependent exemption, a flat deduction that is
allowed for the taxpayer, spouse, and each dependent,
was suspended; thus, no dependent exemptions will be
allowed for tax years 2018–2025
(see Personal exemptions in this section)
. Still, numerous other benefits are available,
so it is important to understand who qualifies to be claimed
as a dependent.
To qualify as your dependent, a person must be either your
qualifying child or a qualifying relative. To be a qualifying
child, the child:
must be your son, daughter, step-child, foster child,
brother, sister, half-brother, half-sister, step-brother,
step-sister, or a descendant of any of these;
must be under age 19 at year-end, or under age 24 at
year-end and a full-time student (these age limits do not
apply to disabled children);
must live with you for more than half the year and must
not have provided more than half of his or her own
must not file a joint tax return (unless this is done solely
for the purpose of obtaining a refund).
To be a qualifying relative, the person:
must not be your (or anyone else’s) qualifying child;
must be related to you in one of the ways specified
below, or must live with you as a member of
must have gross income of less than $4,300
(for 2021); and
must receive more than half of his or her total support
for the year from you.
The specified relationships for purposes of the
qualifying relative test are: child (including adopted child),
step-child, foster child, a descendant of any of these,
siblings, half siblings and step-siblings, parents and
ancestors (but not foster parents), step-parents, nieces and
nephews (including the children of half siblings), uncles and
aunts, son- and daughter-in-law, father- and mother-in-law,
and brother- and sister-in-law.
Claiming Tax Credits for Dependent Family Members
As discussed in a previous section,
the new tax law nearly doubled
the amount of the standard deduction, which for many
taxpayers will mitigate the loss of the personal exemption.
For others, a greatly expanded child tax credit should come
as welcome relief.
You are allowed a credit for each dependent child who
is under the age of 17 on the last day of the tax year.
The amount of the credit is $2,000 per child, although that
amount is phased out if your adjusted gross income (AGI)
is over $200,000 ($400,000 in the case of a married couple
filing jointly). If your credits exceed your tax liability, up to
$1,400 of the credit may be refunded to you, increasing
your tax refund. But there is an important caveat: the credit
is allowed only if your child has a Social Security number
(SSN). A child who has an ITIN (individual tax identification
number) because he or she does not qualify for an SSN is
not eligible for the $2,000 credit.
A special credit of $500 is allowed for each dependent who
doesn’t qualify for the $2,000. This includes children age
17 or over, children with no SSN, and qualified dependents
who aren’t children, such as parents or siblings.
Claiming the Child and Dependent-Care Credit
If you pay someone to provide day-care or household
services for a member of your household while you
work, you probably are entitled to a tax credit for
child and dependent care. You can claim the credit for
employment- related expenses incurred for the care of a
member of your household who is your dependent under
age 13 and any other dependent or your spouse incapable
of caring for himself or herself.
Employment-related expenses include household
services and expenses for care of the qualifying individual.
Expenses of attending a daytime summer camp qualify
if that is a reasonable means of providing care while you
work. However, overnight camp expenses do not qualify
for the credit. A preschool or day-care center generally
qualifies, though an elementary school does not.
Credits are allowed for $3,000 of expenses for one
dependent’s care, and $6,000 for two or more. The credit is
35% if AGI is $15,000 or less. For taxpayers with AGI over
$15,000, the credit is reduced by one percentage point
for each $2,000 of AGI (or fraction thereof) over $15,000.
The minimum percentage of 20% applies to taxpayers with
AGI greater than $43,000. Eligible expenses are reduced
for amounts excluded from income under an employer’s
dependent-care assistance program. Special rules apply
if your spouse is a student or is incapable of caring for
himself or herself.
Most dependent-care payments to relatives qualify,
unless the relative is a child of yours under age 19 or
a person who qualifies as a dependent of you or your
spouse. You must include the name, address, and taxpayer
identification number of the care provider on the return.
If the care provider is a tax-exempt organization, only its
name and address must be furnished.
In some cases, you may be able to pay a relative
to care for your children. This approach allows you
to provide income to a person who may be in a
lower tax bracket while you use the credit.
If your employer offers a dependent-care
assistance program, you should consider using
this benefit. You may exclude from gross income
up to $5,000 ($2,500 if you are married and filing
separately) per year under an employer-provided
program. While these amounts will reduce
the expenses eligible for the child care credit,
the reimbursement plan usually provides better
savings. The employer plan is free from Social
Security and income taxes.
Paying Tax on Your Children’s Income
Special “kiddie tax” rules can apply to the net unearned
income of children under the age of 19 and college
students under the age of 24. These rules are meant to
discourage the transfer of property to dependents in order
to have the income from such property taxed at lower
income tax rates. The new tax law significantly simplified
how these rules apply.
Beginning in 2018, if your child is subject to these rules,
his or her unearned income will be taxed as if it were
retained in a trust. Trusts are subject to similar income
tax rates as individuals, but the brackets are much lower.
For example, the top marginal tax rate of 37% applies
to a married couple filing jointly with taxable income in
excess of $600,000. The same tax rate of 37% applies
to a trust—and a child subject to kiddie tax—with taxable
income in excess of $12,500.
However, in some cases you may be eligible to elect
to include your child’s income in your tax return as if it
belonged to you. This could result in a lower tax burden,
if your effective tax rate is lower than the trust tax rate
that would apply to your child’s income. The administrative
ease of filing only one tax return, and the cost saving of
not having an additional tax return prepared, should also
be taken into account when deciding whether to make
You may find it feasible to transfer
income-producing property to your children
under certain circumstances once they are old
enough to be no longer subject to the kiddie tax
rules. Income accruing to them will be taxed at
their presumably lower rate. In most cases, you
can successfully reduce your family’s overall tax
liability by giving income-producing assets to such
If you transfer the right types of incomeproducing property to younger children, you may
still preserve some benefits. For example, your
child could be given income-producing property
that defers income recognition until the child is
old enough to be no longer subject to the kiddie
tax rules. In this regard, you should consider
giving your child growth stocks, mutual funds,
remainder interests in property, land, tax-exempt
bonds and bond funds, closely held stock,
and market discount obligations (not original issue
By including your child’s investment income on
your return, you may be able to deduct more
investment interest expense, because of your
child’s investment income.
Evaluate the effect of reporting your child’s
income on your return. The tax reform
simplification of the kiddie tax could mean that
your dependent child’s unearned income could
be taxed at a lower effective rate if it is included
on your tax return than if your child files his or her
Alimony Makes a Difference for Both Parties
Alimony is essentially an amount paid by a person to a
spouse or former spouse under a divorce or separation
agreement. Usually, these payments provide support to
a spouse or former spouse with whom you no longer
live. Alimony does not include child support payments or
property settlement amounts. If you pay alimony, you may
deduct it from your gross income in the year you pay
it—even if you do not itemize—as long as you meet certain
requirements. Your spouse or former spouse must include
alimony in his or her gross income in the year it is received.
In certain situations, it may be possible for the parties to
a divorce to elect out of treating payments as alimony for
tax purposes. If this is done, the former spouse making the
payments cannot claim a deduction, and the former spouse
receiving the payments does not treat them as income.
The new law changes the treatment of alimony paid
beginning with divorce settlements or decrees of separate
maintenance concluded in 2019 and after. If you pay
alimony under a post-2018 agreement, you will not be
allowed a deduction and your former spouse will not
include the payment in taxable income. (Alimony payments
made in 2019 and after with respect to earlier divorces or
separations will not be subject to this new rule.)
In general, alimony is paid from the spouse with more
income to the spouse who has less income, i.e., from the
spouse in a higher tax bracket to the spouse in a lower tax
bracket. The new rule could increase the overall tax burden
on the total income of the two spouses, and will mean that
the manner in which an equitable amount of alimony to be
paid is calculated may need to be reconsidered because
the paying spouse will effectively have less income
with which to pay the alimony. Conversely, the receiving
spouse will not have to take tax into consideration when
determining the spending power of the amount received.
Because not all states have adopted this provision,
so alimony related to post-2018 settlements may be treated
as deductible to the payor and taxable to the recipient at
the state level.
If you are paying alimony, carefully review your
situation to ensure that you achieve the most
desirable tax consequences. You may need to
modify agreements to recharacterize payments or
make certain elections. Consult your attorney and
Payment of alimony will be more expensive for
divorces and separations settled beginning in 2019,
because the payment will be made from after-tax
rather than pre-tax dollars.
Not all states have adopted the federal tax rule for
post-2018 settlements. Consult with your tax adviser
to confirm your state tax obligations.
Education: A Top Investment Priority
With higher-education costs climbing steadily upward
(significantly above the general rate of inflation), many
families are particularly concerned about accumulating
sufficient funds to put their children through college.
Cost projections clarify the challenge. For example, based
on projections from The College Board and recent average
annual cost increases, a child who entered kindergarten in
2021 will face four-year costs in excess of $275,000 if he
or she chooses an out-of-state public university in 2029
(assumptions include a 5% inflation rate on tuition costs).
For a private college, costs would be significantly higher.
Various saving/investment alternatives exist. The major
savings vehicles for college expenses are qualified
tuition programs, also known as 529 plans, and Coverdell
education savings accounts (Coverdell ESAs). 529 plans
allow individuals to either prepay tuition credit or make
cash contributions on behalf of a beneficiary for payment
of qualified higher-education expenses. Contributions to a
529 plan are not subject to limits or phase-outs based on
the donor’s AGI, but cannot exceed the necessary amount
of qualified higher-education expenses of the beneficiary.
Contributions are treated as gifts for gift tax purposes;
annual donations of $15,000 (2021 amount) can therefore
be made without incurring gift tax liability. Amounts in the
plan grow tax free, and distributions from the plan are not
treated as income to the beneficiary to the extent they are
used to pay for qualified higher-education expenses.
Coverdell ESAs permit up to $2,000 to be contributed per
year towards qualified education expenses of a beneficiary.
As with 529 plans, contributions are treated as gifts by the
donor to the beneficiary of the plan. However, in contrast to
529 plans, the ability to make contributions to a Coverdell
ESA is subject to phase-out for single filers with AGI
between $95,000 and $110,000 and for joint filers with AGI
between $190,000 and $220,000. The contribution deadline
is April 15 of the following year. Amounts within the
account can grow tax free and are not treated as income to
the beneficiary if used for qualified education expenses.
If your child receives a scholarship
Monitor estimated tax payments for children who
receive taxable scholarships, as the institutions
granting the scholarships are not required to