Federal income taxes in the U.S. have a long history. The first federal income tax was created in 1861 as a mechanism to finance the Civil War. In 1862, Congress passed the Internal Revenue Act that created the Bureau of Internal Revenue, a predecessor to the IRS. Modern taxing began in 1914 when the Bureau of Internal Revenue released the first income tax form, called Form 1040. This form remains the main income tax form, and it has been modified and re-issued numerous times since then.
Nowadays, whether you are a U.S. citizen or resident alien, you must file a federal income tax return depending on your gross income, filing status, your age, and whether you are a dependent. You are required to file a tax return even if you owe no tax. Otherwise, you may have to pay the penalty if you didn’t file, but you were supposed to. If you willfully fail to file a return, you may be subject to criminal prosecution.
You may wonder if supporting dependents, such as a disabled or an elderly relative or your children, can bring you certain tax benefits concerning tax returns. It is crucial to keep in mind that tax benefits apply only to individuals supporting other people. Furthermore, if nobody can claim you as a tax dependent, there are some tax deductions and credits that you are eligible to claim for yourself.
Determining whether someone is eligible as a tax dependent can be confusing. That’s why this article will provide you with the essential information concerning this subject. Make sure if anything remains unclear, to evaluate the IRS Publication 501 carefully.
In this article, we will cover:
- Tax return basics
- Can you claim yourself as a dependent?
- Who qualifies as a tax dependent?
- Who can’t be eligible as a tax dependent?
- Reduce your taxes by claiming a dependent
- How to file your federal taxes
- Achieve your financial freedom with Infinite banking
Tax returns are official forms filed with a tax authority, such as the Internal Revenue Service (IRS) or the state or local tax collection agency. When filing tax returns, taxpayers can calculate their liability, request refunds, and schedule tax payments.
Typically, a tax return begins with the taxpayer providing personal information, including filing status and dependent information. The three main sections of a tax return are income, deductions, and tax credits.
In the income section, all sources of income are listed. The taxpayer must report dividends, self-employment income, wages, and capital gains in this section. The most frequently used method of filing an income is a W-2 form submitted by the employer.
The second section is the tax deductions section. Taxpayers may use a standard deduction for their filing status, or they may use itemized deductions. It is important to note that you can use only one type of deduction.
A tax credit is an amount of money that can be subtracted from the taxes owed to the government. In other words, a tax credit reduces the actual amount of the tax owed. Usually, credits are ascribed to the care of dependents, pensions, education, etc.
The federal individual income tax has seven tax rates, the lowest being 10% and the highest marginal rate being 37%. Marginal tax rates and tax brackets apply only to taxable income.
Taxable income is the portion of an individual’s or a company’s income that they owe to pay the government in a tax year.
Taxable income is easily calculated by subtracting deductions from the adjusted gross income (AGI). Adjusted gross income includes earned income (wages, tips, salary, etc.) and unearned income (interest earned on investments, dividends, royalties, gambling).
If you are self-employed that overpaid quarterly taxes, or if you’re an employee and withheld too much from your paycheck, you will likely get a tax refund from the IRS. And if you’ve underpaid, you’ll have to pay the remaining balance by May 17 unless you file for an extension.
To answer the question, you can’t literally claim yourself as a dependent, but there are some tax benefits if nobody is able to claim you as their dependent. In that case, certain tax benefits will go to you rather than to a person taking care of your needs.
Through 2017, the most common benefit for filing taxes on your own was claiming the personal exemption. A personal exemption was essentially a tax deduction used to reduce the amount of your income that is subject to federal income tax.
In 2017, the personal exemption was $4,050 per person, unless you had lucrative income.
On Dec. 22, 2017, President Trump signed the Tax Cuts and Jobs Act into law. President Trump’s changes to the tax code are considered the most significant tax change in the last 30 years, with a substantial impact on both taxpayers and business owners.
In a nutshell, The Tax Cuts and Jobs Act brought several significant changes:
- The law created a lower single corporate tax rate of 21%.
- The Tax Cuts and Jobs Act kept the old structure of seven individual income tax brackets, but the new law lowered the rates in most cases.
- The law raised the standard deduction for joint tax return (from $12,700 to $24,000), for single filers (from $6,350 to $12,000), and heads of household (from $9,350 to $18,000).
- The personal exemption was suspended.
- The law temporarily raised the child tax credit to $2,000, with the first $1,400 refundable, and created a non-refundable $500 credit for non-child dependents.
- Almost all changes will expire after 2025.
To conclude, aside from personal deductions, other tax deductions and credits require that you not be someone’s dependent. The tax benefits for non-dependents can be a standard deduction, or the earned income tax credit, providing an economic boost to low-income people, only available if you can’t be claimed as someone’s dependent.
Likewise, the American opportunity credit and lifetime learning credit to support educational expenses can either go to a student or someone claiming that student as a dependent, but not both.
Either way, all taxpayers look for available tax deductions and credits to either lower their balance or ways to increase their refund. However, if you are filing taxes for your family, a great way to reduce your tax balance is to claim a qualifying dependent.
First and foremost, a tax dependent is someone you support, often a child or a relative, allowing you to claim certain tax deductions and credits.
To claim these benefits, such as head of household filing status, the Child Tax Credit, the Earned Income Tax Credit, or the Child and Dependent Care Credit, you must have provided at least half of the person’s total financial support for the year. A tax dependent must meet specific requirements to be recognized as a qualified child dependent or a qualified relative dependent.
When you’re claiming a child as a dependent, several requirements need to be met:
- The child has lived with you for at least half of the tax year.
- The child has to be a part of your family (for example, son, daughter, brother, sister, stepchild, foster child, stepsibling, or a descendant of any mentioned).
- The child must be 18 years old or younger at the end of the year or 23 or younger if it’s a full-time student. In this instance, the child must have attended school full-time during at least five months of the tax year to be a student.
- The child has to be younger than you or your spouse if married filing jointly, unless the child is permanently disabled, as determined by the doctor.
A qualifying relative can be any age, but to be considered your dependent, the individual must meet tax laws criteria:
- The individual can’t be someone else’s qualifying dependent.
- The individual has to be related to you (your child, adopted child, stepchild, sibling, nephew, niece, parent or stepparent, grandparent, your in-law, uncle, or aunt).
- They lived with you during the whole tax year.
If the individual isn’t related to you but meets the rest of the requirements, they can be considered your dependent.
When claiming dependents, keep in mind:
- Dependents can have their own tax returns and even be married, but they must not have filed a joint tax return for the year unless it’s just to claim a refund.
- The dependent must be a U.S. citizen, U.S. national, a resident alien, or a resident of Canada or Mexico. If they are a resident of Canada or Mexico, they must have a Social Security number and meet all other qualifications.
- If a person died at any time during the year but lived with you as a member of your household, they are considered to have lived with you for the entire year. If a child was born at any time during the year and has lived with you as a member of your household for the rest of the year, they are also considered to have lived with you all year.
- They must have a taxpayer identification number, usually a Social Security Number, but it can also be an Individual Taxpayer Identification Number (ITIN) or an Adoption Taxpayer Identification Number (ATIN).
- The person must have made less than $4,300 in gross income during 2021.
It’s important to emphasize who can’t be counted as your tax dependent:
- A married person who files a joint tax return (there are some notable exceptions to this, for all the details, check IRS Publication 501)
- A person who is not a U.S. citizen, U.S. resident alien, U.S. national, or a resident of Canada or Mexico (there are exceptions here for people adopting children)
- People who work for you
- Foreign exchange students
Until recently, claiming a dependent on your tax return would get you dependent exemptions. Under the Tax Cuts and Jobs Act of 2017, claiming a personal exemption for yourself, your spouse, or dependents is no longer an option. However, whether you qualify, claiming a dependent is going to get you the following benefits:
The child tax credit is worth up to $3,600 per qualifying child dependent under six and up to $3,000 per qualifying dependent child 17 or younger. A non-child qualifying dependent will get you $500 in credit per dependent.
Head of household filing status will entitle you to bigger tax deductions and more advantageous tax brackets than if you filed your tax return as single.
In 2020 child and dependent care tax credit was up to 35% of up to $3,000 of child care and similar costs for a child under 13, spouse or parent unable to care for themselves, and up to $6,000 of expenses for two or more dependents.
Child dependent care tax credit in 2021 is up to 50% of up to $8,000 of daycare for one dependent or $16,000 for two or more dependents. For high-income earners, the percentage of allowable costs decreases, and so does the credit value.
- This credit isn’t refundable for the 2020 tax year, which means it can take your tax bill down to zero, but you don’t get the leftovers. For the 2021 tax year, however, this tax credit is refundable.
- Payments made out of a dependent-care flexible spending account or other tax-advantaged programs at work may reduce your credit.
In the tax year 2020, depending on how many kids you have, how much you make, and your marital status earned income credit would get you between $538 and $6,660. For the tax year 2021, depending on the tax-filing situation and number of children, this credit ranges from $543 to $6,728.
If you don’t have kids and your income is less than $15,820 as a single filer or $21,710 if you’re filing jointly, you could get up to $538 from the earned income credit in 2020. The American Rescue Plan broadened the eligibility for the earned income credit by eliminating the upper limit (65 years old) and reducing the lower limit to age 19.
It’s important to note that there were special rules in the 2020 tax year due to coronavirus.
You could use either your 2019 income or your 2020 income to calculate your earned income tax credit, and you can use the number that gets you a more significant credit. This is also the case for theChild Tax Credit!
Adoption credit used to cover up to $14,300 in adoption costs per child for the 2020 tax year. In 2021, the IRS raised the adoption credit to $14,440.
Remember that you can’t take the adoption credit if you’re adopting your spouse’s child.
Furthermore, people who adopt children with functional needs can get full credit even if the adoption costs are less.
There’s a wide variety of different forms available:
- W-2 form from your employer, detailing which taxes were withheld and your earnings
- Form 1099-NEC to report nonemployee compensation if you’re working freelance or on a contract
- Form 1099-DIV or Form 1099-INT reporting if you have any dividends or interest earned on investments.
- Form 1098-E reporting a student loan interest you’ve paid
- If you’re a college student (or you have a dependent who is a college student), you’re going to receive a Form 1098-T, reporting how much you paid in tuition, as well as any amounts you received from grants or fellowships. This form will also help you figure out available credits and deductions related to education expenses.
Nowadays, the easiest way to file your taxes is to file electronically. There are many tax preparation software on the market that are easy to use, affordable and accurate. The most popular tax filing software packages allowing you to e-file are The IRS Free File program, TurboTax, FreeTaxUSA, and Credit Karma Tax.
However, if you feel like your situation is a bit more complicated, and you need help from an expert, you should consult a tax preparation firm or an accountant. The IRS has a directory of certified tax preparers that are trustworthy.
Always look towards available tax advantages that you can claim, thus lowering your overall tax bills.
Always file your tax returns on time to avoid penalties and interest.
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Get a closer look at the qualifiers to determine whether you’re eligible to claim dependents and get a tax credit to reduce your tax burden significantly.
Finally, if you didn’t qualify for dependents in prior years, consider rechecking your eligibility each year so you won’t miss out on tax break opportunities.
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