Tax-filing season always has bumps in the road, for families with children but this year the pandemic has added a few more twists regarding student loans, tax credits and other matters.
Here are some strategies and reminders to help parents avoid being tripped up, and some ways to trim the tax bill now and in future years.
*Student loan debt. “Tax deduction filing will look a bit different for the 2020 tax year for federal student loan borrowers whose payments were paused since last March 20,” said Anna Helhoski, a student loan expert at NerdWallet.
How does that impact taxes? It means borrowers can only deduct student loan interest in the payments made prior to the pause, made voluntarily, or on any private loans, which were not suspended, she said.
Despite the pause, keep in mind that all student loan interest payments are reported to the Internal Revenue Service, Helhoski said. To get the student loan interest deduction, filers will need to use form 1098 E – the student loan interest statement – to find out how much was paid in interest last year.
The lender or loan servicing company automatically provides the statement to anyone who paid $600 or more in 2020; otherwise filers will need to contact them for the form.
*College remote learning. College students who attended classes remotely last year because of the pandemic can’t deduct additional costs or living expenses, Helhoski said. But families have several other options available – namely the American Opportunity and Lifetime Learning tax credits – as well as a tuition and fees deduction as long as income requirements are met, Helhoski said.
*Child Tax Credit. This credit offers up to $2,000 per qualifying dependent child age 16 or younger at the end of the calendar year. This is a tax credit, meaning it reduces your tax bill on a dollar-for-dollar basis, said Mike Savage, CEO of 1-800Accountant.
Eligible tax filers must have modified adjusted gross income under $400,000 if filing jointly, or $200,000 for individuals. For the 2020 tax year, there are special rules because of the pandemic: You can calculate your earned income tax credit with either your 2019 or 2020 income, and you can use whichever number gets you the bigger earned income tax credit.
*Adoption Tax Credit. For adoptions completed in 2020, the tax code provides a credit of up to $14,300 for qualified adoption expenses, including legal and court costs.The credit is available for each child adopted.
*Retirement accounts. Children of all ages can open a Roth Individual Retirement Account (IRA) – as long as they have earned income. For example, if your child earned $2,000 last year from babysitting, or lawn mowing, then he or she can contribute up to $2,000 in a Roth IRA. The maximum annual contribution is $6,000.
A parent will need to open a custodial account, and most financial institutions do not require a minimum initial contribution. While there is no upfront tax break – no big deal since most kids pay little or no income tax – Roth contributions and earnings grow tax-free.
*College savings plans. Getting a tax refund? Consider channeling it into a 529 college savings plan to fund future college costs. Although contributions are not tax deductible, earnings in a state-sponsored 529 grow tax-free and will not be taxed when money is withdrawn to cover college tuition and eligible expenses, and K-12 tuition.
