Dependents and Tax Credits, Deductions
Your kids can be beneficial at tax time; that doesn't mean they'll sort your tax receipts or refill your coffee, but those charming children may help you qualify for some valuable tax benefits. The IRS defines a dependent as a qualifying child or qualifying relative. In most cases, a child can be claimed as a dependent in the year they were born or adopted.
Dependent Credits and Deductions
The easiest and most accurate way to find out who you can claim as a dependent on your tax return and what tax credits and deductions you qualify for is to start a free tax return on eFile.com. Based on your answers to the tax questions, we will determine whether or not you can claim the person as a dependent and find all the tax deductions and credits you qualify for so you don't have to do the work!
Dependent Credits on your Tax Return
Below, find the tax credits that your dependent may qualify you for. These are calculated on your return, not your dependent's return, if you claim them. You receive these credits to offset your tax liability (or taxes owed) and potentially receive the refundable portion back as a tax refund.
Child Tax Credit Advance Payment and Amounts
Important: The Enhanced Child Tax Credit for 2021 went through some changes to help parents get some extra help for raising children. This includes an increased credit amount, age threshold change, and the removal of the minimum earned income requirement. Here are the particulars:
The Advance Child Tax Credit for 2021 or AdvCTC, as part of the American Rescue Plan Act, is a refundable tax credit. It is an advance payment of a tax credit you qualify for on your 2021 tax return due on Tax Day, April 18, 2022.
- The tax credit amounts will increase for many qualifying taxpayers, giving parents or guardians up to $3,600 per child.
- Unlike the regular Child Tax Credit, there is no 2021 taxable income requirement to be eligible to claim the advance child tax credit. The advance Child Tax Credit for qualifying children is a fully refundable credit. As a U.S. Citizen with a U.S. address for at least half of 2021, you could benefit from the credit even if you do not owe taxes or have earned income.
- Qualified recipients will have the option to receive monthly direct payments as part of the Child Tax Credit from the IRS during 2021 before filing your 2021 Tax Return in 2022.
- These advance payments will not be reduced or offset for overdue taxes or other federal/state debts that taxpayers or their spouses owe, but it is not exempt from garnishment. It may, however, be subject to offset for tax debts if/when claimed on the 2021 return as a tax refund.
You may be able to get a Child Tax Credit for each of your qualifying children under age 18. This partially-refundable credit is intended to offset the cost of raising children. The maximum amount you can get for each child is $3,000 per child for children over the age of six and $3,600 for children under the age of six for Tax Year 2021. If you do not benefit from the full amount of the Child Tax Credit (because the credit is greater than the amount of income taxes you owe for the year), you may be eligible for the refundable tax credit known as the Additional Child Tax Credit.
eFile Tax Tip: Use our FREE "CHILDucator" Child Tax Credit tax tool to find out whether or not you qualify to claim the Child Tax Credit on your tax return.
Credit for Other Dependents
Dependents who do not qualify for the Child Tax Credit may still qualify you for the Credit for Other Dependents. This is a non-refundable tax credit up to $500 per qualifying person. The qualifying dependent must be a U.S. citizen, U.S. national, or U.S. resident alien.
eFile Tax Tip: Use our FREE "RELucator" qualifying relative educator tool to find out whether or not you qualify to claim the Credit for Other Dependents on your tax return.
Child and Dependent Care Tax Credit
You may be able to claim the non-refundable Child and Dependent Care Credit if you pay someone to care for your child or children under age 13 so that you can work or look for work. For 2021 Returns, the American Rescue Plan Act made the credit substantially more generous, up to $4,000 for some or all of the expenses you paid to the care provider for one qualifying person and $8,000 for two or more qualifying person, and potentially refundable, so you might not have to owe taxes to claim the credit (so long as you meet the other requirements). The credit is based on your yearly income and the number of children.
Earned Income Tax Credit (EITC)
The Earned Income Tax Credit (EITC) is a fully refundable tax credit for low-income people who work and have earned income from wages, self-employment, or farming. The EITC reduces the amount of tax you owe and may also give you a tax refund. If you have one or more dependent, you will see a higher amount with each dependent based on your income.
Important: The 2021 EIC went through some changes to give single taxpayers with no dependents a more beneficial credit.
eFile Tax Tip: Use our FREE "EICucator" Earned Income Tax Credit tax tool to find out whether or not you qualify to claim the EIC credit on your tax return and how much your credit might be.
Adoption Tax Credit
You may be able to take the non-refundable Adoption Tax Credit for qualifying expenses you paid to adopt a child. The maximum adoption credit for 2021 returns is $14,440 per child. These expenses include adoption fees, attorney fees, court costs, traveling expenses (including lodging and meals while away from home), and other expenses directly related to the adoption. When you prepare and e-File your tax return on eFile.com, you can enter your adoption expenses and we will automatically prepare and report your Adoption Tax Credit on Form 8839 - eFileIT - and it will be e-Filed with your return. If you are claiming the Adoption Credit and need to include adoption-related documents, you can print your return from your eFile.com account mail it in with your documents.
American Opportunity Education Credit
Unfortunately, there are not many credits or deductions for older dependents, such as college students. If you claim your dependent child under 24 who is enrolled full-time in school, you are eligible for one of a few options. These are tax credits that, if your student dependent does not claim on their own, are claimable on your tax return.
You can claim the American Opportunity Credit if your child is in his or her first four years of post-secondary school. The maximum amount you can claim is $2,500 per eligible student, per year, and the credit is 40% refundable. This is the most beneficial credit for education expenses and can help offset the many costs of attending hire education. The credit is calculated for you on eFile.com and the refundable portion is included in your tax refund.
Lifetime Learning Education Credit
If your dependent doesn't qualify for the American Opportunity Credit because he or she already completed four years of post-secondary school, you may be able to claim the Lifetime Learning Credit. The amount of the credit is 20% of the first $10,000 of combined post-secondary tuition and fees you paid for your dependent child and is non-refundable. The per year (not per child) total should be no more than $2,000. Though you cannot claim both education tax credits for one student, you can claim one of the credits for one student and the other credit for another student.
Tax Deductions to Claim with Dependents
Tax deductions work differently than tax credits. They both, however, serve to lower your tax liability and increase your refund. When you prepare and e-file your return on eFile.com, we will find all the deductions you may be able to claim on your return when you claim one or more qualified dependent.
Student Loan Interest Education Tax Deduction
You may be able to claim the Student Loan Interest Deduction for interest paid on a qualified student loan, even if you choose to claim a student tax credit. If you decide to claim the deduction, you could reduce your taxable income by up to $2,500 of the student loan interest you have paid for your dependent child. You don't need to itemize your deductions to claim this.
Tuition and Fees Education Deduction
Based on your tax information, eFile.com will let you know if the Tuition and Fees Deduction is more beneficial than claiming one of the other education tax credits. Generally, the credits tend to show better results, but the deduction may be used if it decreases your tax liability and/or increases your refund. This deduction applies for single taxpayers with an Adjusted Gross Income (AGI) or $80,000 or less and $160,000 or less for taxpayers filing jointly.
Standard Deduction and Head of Household
The single or Head of Household (HOH) filing status on your tax return has a direct impact on the standard deduction amount you will be eligible for. You do not have to worry about the amount as it will be applied based on your filing status by the eFile.com tax app when you prepare and eFile your taxes.
eFile Tax Tip: Use our FREE "HOHucator" Head Of Household tax tool to find out whether or not you qualify as Head of Household as a single taxpayer.
Keep in mind that even though you might claim a dependent on your tax return, you do not claim any income they earned from working. If your dependent has income, they may be required to file a tax return. If this is the case, you may not be able to claim the person as a dependent based on various factors:
- Total earned income
- Filing status
- Age, AND
- Amount of support you have provided for your dependent during the tax year.
However, you might be able claim the person as an IRS Qualifying Relative based on the factors above (limits and qualifications vary).
See how a dependent files a tax return.
Dependent Investment Income
However, according to the IRS, you may be able to qualify to include your dependent's investment income on your tax return. Your dependent will not be required to file a return if you choose to do this. You can do this if you meet the following conditions:
- Dependent was under 19 years old (or under 24 years old if he or she was a full-time student) at the end of the tax year.
- Dependent total gross income was less than $10,000.
- Dependent income is only from dividends and interest (includes capital gains distributions and Alaska Permanent Fund dividends.
- Dependent didn't file a joint return for the tax year.
- Your child is required to file a return (unless you qualify to include the child's income on your return).
- No federal income tax was withheld from your dependent's income under the backup withholding rules.
- No estimated tax payment was made for the year and no overpayment from the previous year (or from any amended return) was applied to the current tax year under your dependent's name and Social Security Number.
- You are the parent whose tax return must be used when applying the special tax rules for children.
To apply for the election to include your child's investment income on your tax return, when you prepare your return on eFile.com, you can complete Form 8814, Parents' Election To Report Child's Interest and Dividends, and eFileIT with your return. Please note that if you choose to include your child's investment income on your tax return, your tax rate may increase (in comparison to filing a separate return for your child) and you cannot claim certain deductions (such as itemized deductions).
However, under certain circumstances, a child’s investment income may be taxed at your tax rate (as a parent) if all the following factors apply:
- Your child’s investment income was more than $2,200 for the entire tax year,
- Your child is required to file a tax return,
- Your child was either:
- Under 18 years of age at the end of the year,
- Under 18 years of age at the end of the year and didn't have earned income that was more than half of his or her support, OR
- A full-time student over the age of 18 and under 24 years of age at the end of the tax year and did not have earned income that was more than half of his or her support.
- At least one of the child’s parents was alive at the end of the year, AND
- The child didn't file a joint return for the tax year.
If all of the factors above apply to the child with investment income and you don't or can't choose to include the income on your return, Form 8615, Tax for Certain Children Who Have Investment Income of More Than $2,200 - eFileIT - must be completed and attached to your child's tax return.
Health Insurance Deduction for Children of Self-Employed Individuals
If you were self-employed (for example, a sole proprietor or an independent contractor) and you paid for health insurance, you may be able to deduct any premiums you paid for coverage for any child of yours who was under age 27 at the end of the year, even if the child was not your dependent.
In order to qualify for the deduction, one of the following statements must apply to you:
- You were self-employed and had a net profit for the tax year reported on Schedule C (Profit or Loss From Business) or Schedule F (Profit or Loss From Farming).
- You were a partner with net earnings from self-employment for the tax year reported on Schedule K-1 (Partner's Share of Income, Deductions, Credits, etc.), in box 14, code A. This schedule is for Form 1065 (U.S. Return of Partnership Income).
- You used one of the optional methods to figure your net earnings from self-employment on Schedule SE (Self-Employment Tax).
- You received wages from an S corporation in which you were a more-than-2% shareholder (Health insurance premiums paid or reimbursed by the S corporation are shown as wages on Form W-2, Wage and Tax Statement).
The insurance plan must be established under your business. Alternatively, it could be considered for establishment, as discussed in the following statements:
- If you are a self-employed individual filing a eFileIT Schedule C or F, a policy can be either in the name of the business or in your name.
- For partners, a policy can be either in the partnership's name or the partner's name. You can either pay the premiums yourself or your partnership can pay them and report the amounts on eFileIT Schedule K-1 (for Form 1065) as guaranteed payments to be included in your total gross income. However, if the policy is in your name and you paid the premiums yourself, the partnership must reimburse you and report the premium amounts on Schedule K-1 (Form 1065) as guaranteed payments to be included in your total gross income. Otherwise, the insurance plan will not be considered to be established under your business.
- For more-than-2% shareholders, a policy can be either in the S corporation's name or in the shareholder's name. You can either pay the premiums yourself or your S corporation can pay them and report the amounts on a Form W-2 as wages to be included in your total income. However, if the policy is in your name and you paid the premiums yourself, the S corporation must reimburse you and report the amounts on a Form W-2 as wages to be included in your total income. Otherwise, the insurance plan will not be considered to be established under your business.
Medicare premiums you voluntarily paid to obtain insurance in your name that is similar to qualifying private health insurance can be used to figure the self-employed health insurance deduction. If you previously filed returns without using Medicare premiums to figure the deduction, you can file tax amendments to redo the deduction. However, amounts paid for health insurance coverage from retirement plan distributions that were nontaxable because you are a retired public safety officer cannot be used to figure the deduction.
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