As an owner-operator, you are responsible for paying taxes and calculating the net profit for your business. You can minimize tax liability by claiming every legal deduction and credit available. If you are a parent, you are entitled to numerous tax benefits. Having children qualifies you for some specific tax deductions that can significantly lower your liability. We have compiled a list of these deductions that will reduce the amount of taxes you owe.
Here are some tax deductions specific to parents:
Claiming dependents
This is the most commonly known tax deduction for parents and a very important claim to significantly lower your liability. Claim your child as a dependent on your tax return, even if your child was born during the tax year. This will be shown as a certain amount and will reduce your taxable income. The dependent in question must be a US citizen and must have lived with you for more than half of the year in question. Your tax professional can help you determine if you qualify or you can use the resources on www.IRS.gov to determine your eligibility.
Child Tax Credit
For a child to be eligible, they must be 16 years old or younger and a relative. Also, they must not have provided more than half of their own support, and you must be claiming them as a dependent on your return. The Child Tax Credit could reduce your income up to $2,000.
If you have children that are under the age of 17, you may be able to receive a $2,000 child tax credit. That means if you have two kids, you will be able to lower your tax liability by $4,000.
There are income restrictions that will cause the credit to phase out. This happens when single filers earn $200,000 or more. Or if you’re filing jointly this will happen once you earn $400,000.
For many people, this credit will be nonrefundable. However, for some lower income filers you might be able to get a refund if the credit is greater than your tax liability. The formula for calculating this amount is fairly complex, so it’s best to speak with a tax professional to see if you are eligible.
Child and Dependent Care Credit
To qualify for this credit, a child must be less than 13 years old and someone other than a spouse or a dependent is paid to care for them. Both parents must be working to qualify.
If both you and your spouse are working parents, then you probably use some form of childcare. Depending on your location, this can be quite the expense each month. Luckily, you may qualify for a tax credit of 35 percent for the first $3,000 paid for one child or $6,000 when paying for two.
Just like other tax credits, the amount you can claim will decrease as your income goes up. For every $2,000 above an AGI of $15,000, the credit will be reduced by one percent until it reaches 20 percent.
Earned Income Tax Credit
This is a tax benefit for people who make less than $63,698 a year. There are several specific qualifications, but you can easily find out if you qualify by using the EITC assistant. The amount you will receive depends on income, family size, etc. If you have qualifying children, you could get up to $7,430 extra back when you claim this credit. Be prepared to answer several questions with your tax professional for this fantastic credit that could save you thousands of dollars.
Depending on your income and the number of children you have, you might qualify for the earned income credit. This was created so that lower-to-middle income families would be able to make ends meet.
In order to qualify, your adjustable gross income (AGI) must fall below the following amounts.
$17,640 ($24,210 when filing jointly) for zero qualifying children
$46,560 ($53,120 when filing jointly) for one qualifying child
$52,918 ($59,478 when filing jointly) for two qualifying children
$56,838 ($63,698 when filing jointly) for three or more qualifying children
Adoption Credit
If you adopted a child, there are tax benefits available regarding some expenses incurred during the adoption process. The Adoption Credit includes both a credit for the adoption expenses and exclusion for employer-provided adoption assistance.
For foreign adoptions, you must wait until the adoption is finalized to claim these credits.
For domestic adoptions, you can claim the credit for expenses paid before the year the adoption becomes final or you can claim the credit for the tax year following the year of payment.
If your family made the decision to adopt a child in 2023, you may be eligible for a tax credit of up to $15,950. If your AGI is greater than $239,230, the credit will begin to phase out. If your AGI was greater than $279,230 the credit won’t be applicable.
Higher Education Credits
If you paid for your child’s higher education, you may qualify for either the American Opportunity Credit or the Lifetime Learning Credit. The American Opportunity Credit can reduce tax liability up to $2,500 for each child in college as long as the adjusted gross income is less than $80,000 if single, and $160,000 if filing jointly. The Lifetime Learning Credit can also reduce the amount of tax liability by up to $2,000. Talk to your tax professional for more details on how to qualify for these credits.
American Opportunity Credit
If you have a child in college, then you’re nearing the end of your financial responsibility. But now is probably also the most costly time for you. College expenses are increasing each year, but with the American Opportunity credit, you’ll receive a small reprieve.
You will receive a 100 percent credit on the first $2,000 paid toward qualified education expenses, and 25 percent for the next $2,000 spent per student, per year for up to four years. Plus, up to $1,000 of this credit is refundable.
The American Opportunity credit will begin to phase out for anyone that has an AGI greater than $80,000 ($160,000 when filing jointly). You will no longer be eligible when above $90,000 ($180,000 when filing jointly).
Lifetime Learning Credit
This credit helps parents and students pay for post-secondary education (grad school and night school tuition). You may be able to claim a Lifetime Learning Credit of up to $2,000 per qualified individual on the tax return at a rate of 20% of the funds spent on qualified college tuition expenses. There is no limit on the number of years the Lifetime Learning Credit can be claimed for each student.
Student Loan Interest
If you are paying student loans, you may be able to deduct the interest you paid from your income. This is applicable even if you do not itemize your deductions, however, the loan must have been taken out only to pay for education costs.
This deduction is available when you are paying off a student loan. You are eligible to deduct up to $2,500 of interest per tax return. The student loan interest deduction is taken as an adjustment to income. This deduction has limitations and will begin to phase out at a Modified AGI of $75,000 ($150,000 when filing jointly) and ends at $90,000 ($180,000 when filing jointly).
Self-Employed Health Insurance Deduction
If you are paying for your child’s health insurance under your company health care plan, generally your company can deduct the insurance costs. Ask your tax professional for more details on how to use this deduction.
Child Wages Deduction
Hiring your children to do easy tasks will give your business a tax deduction for their wages. Pay children with a check, issue them the appropriate tax form, and create a job description for them to claim this deduction.
As an owner-operator and a parent, it is important to the success of your business and your family’s future to take advantage of these great tax credits. If you would like more information on any of these tax credits for parents, contact ATBS at 866-920-2827 (ATBS) or visit the IRS website.
529 Plans
This program allows you to either prepay or contribute to an account to pay for a student’s qualified higher education expense at an eligible educational institution.
Tax-free as long as they are used to pay for qualified higher education expenses.
Distributions can be used for tuition, required fees, books, supplies, and room and board.
There are no income limit contributions.
No age limits. Open to adults and children.
The contributor of the account has control, not the student.
There is no federal limit on the number of changes you make if you replace the student’s account with another qualifying family member at the same time.
Distributions from 529 Plans can be used to pay $10,000 of tuition per beneficiary each year. K-12 in public schools, private or religious schools.
Be aware that your investment options may be limited when making changes to them.
Kiddie Tax
Part of a child’s 2023 unearned income more than $2,500, such as dividends and interest, may be taxed at the parent’s tax rate. This is for children under the age of 19 or a full-time student under the age of 24 who do not earn any income.
As an owner-operator and a parent, it is important to the success of your business and your family’s future to take advantage of these great tax credits. If you would like more information on any of these tax credits for parents, contact ATBS at 866-920-2827 (ATBS) or visit the IRS website.