As tax season
approaches, let’s review several tax savings opportunities related to children.
The Child Tax Credit
For every child
under the age of 17, you get a $2,000 tax credit. For children 17 and over, you
get only $500. A tax credit is very straightforward. It means a full $2,000 (or
$500) off your taxes. Your income has to be under $400,000 to qualify. This
generous income cap is a big boon to frum
families.
If a family (such
as a kollel couple with no income) owes no taxes, they still get the 40% of the
credit, or $1,000 ($2,500 x 40%).
The Child Care Credit
You save 28% of
the cost of daycare. Now the details:
1) The maximum
costs that count are $3,000 for one child and $6,000 for two or more children. The
maximum savings is therefore $6,000 x 28%=$1,680. Important: If two children
receive care, the costs do not have to be split evenly. One child can be $5,900
and the other child can be $100.
2) Both parents
must be working or be students. Therefore, if one parent works and the other is
in college (or kollel), they would qualify.
3) The child must
be under 13.
4) Day camp costs count
but not sleep-away camp. (The question arises of what happens if the child
turns 13 during camp.)
5) Preschool
counts. However, the tax law says only up to the grade level two years before first
grade. In the olden days, there was nursery, then kindergarten, then first
grade. Under that system, nursery counted but kindergarten did not. Now it gets
confusing. Our girls’ schools continue to use the terms “nursery” for
four-year-olds and “kindergarten” for five-year-olds. Then comes first grade.
Therefore nursery counts and kindergarten does not – like the olden days.
However, our boys’
schools call the four-year-old grade kindergarten and the five-year-old grade
pre-1A, followed by first grade. In that system, kindergarten counts because it
is two grades before first grade. The fact that frum people call it kindergarten does not disqualify it.
What if a child attends
kindergarten and at the end of the school year is told to repeat kindergarten.
Can you now count the first year of kindergarten since it turned out to be two
grade levels before first grade? It’s not clear; consult your accountant.
Obviously, a calendar
year encompasses two different school years. Let’s take a girl born July, 2014.
She will start first grade in September 2020, when she is six years old. In September
2018, she started nursery. She ended nursery in June 2019. In September 2019,
she started kindergarten. I am filing her parents 2019 taxes. I can count the
months of January to June, 2019 (when she is in nursery) but not September to December,
when she is in kindergarten. Parents should keep track month by month. On the
majority of tax returns I prepare, I need to help the parents work it through
month by month.
6) You need to put
down the caregiver’s name, address, and social security number on your tax form
to get this credit. However, I am not aware of any requirement that it has to
be “legal” daycare.
7) Some care
providers do not want to give out their social security number (which is a good
idea in my opinion). Those people can get a federal ID number. You can get the number
(called an EIN) online from the
College Tax Credits
There are two tax
credits that apply to college, and they can result in major savings. The more
generous one is called the American
opportunity tax credit. It offers a 100% credit for the first $2,000 spent.
Therefore, if you spend $2,000 you save $2,000 on taxes. The second $2,000 spent
qualifies for a 25% credit, meaning an additional $500 savings, for a total
savings of $2,500. Now the details:
1) This credit is
per person in the family. Therefore, if you have five children in college, you
can save $12,500 (5 x 2,500 = 12,500).
2) You can claim
this for four years for each child.
3) You can only
claim this for the first four years of college. I assume that means until you
get a bachelor’s degree. For this person, your status is fixed as of Jan 1st
of the year. Therefore if you graduate in June and start a master’s program in
September then the cost of the master’s program would count for this credit.
4) The student
must be enrolled at least half of whatever is deemed to be full time.
5) The money spent
on supplies fees and books count. This could include a computer, laptop, and, I
suppose, a smart phone. Imagine a student receiving a 100% scholarship. They
can go out and spend $2,000 on laptops and other supplies and have the government
pay for it.
6) You must be
enrolled in a college that is eligible. Eligible means that they can receive
government college aid called Pell grants.
7) You must have
received a 1098-T form from the college. There are some exceptions to this
rule.
8) Whoever claims
the child as a dependent (typically the parents) can claim the tax benefits. It
does not matter who paid the tuition.
9) If you are
paying for college tuition with money in a 529 fund, you need to know what you
are doing in order to preserve your tax credit.
Now the questions:
Many frum students are enrolled in
dual programs. They are enrolled in an accredited college from which they will graduate.
However, they are also transferring into that college credits they received from
yeshivas, seminaries, and self-study programs. This creates several issues:
1) At what point
in time are they deemed to be enrolled in the eligible college? For example, if
they enroll in November, can they include expenses paid pre-November?
2) For that matter,
can they count the cost of the yeshivas or the self-study courses at all?
3) Many yeshiva
students receive tuition breaks. Is the remaining tuition that is paid
considered tuition, which counts, or room and board, which does not count?
4) What happens if
you do not receive a 1098-T at all? This can happen if the student is in kollel
and does not pay tuition.
5) As of what date
does the student earn a bachelor’s? This is important because that would be the
last year that this credit can be claimed. Delaying the official date of undergraduate
graduation into the next year might be very advantageous.
The second college
tax credit is called the lifetime
learning credit. This does not have any four-year rules, so it is typically
used beyond the four years that the other credit is used. It gives you 20% of
the first $10,000 in tuition payments per
family. You do not have to be half-time and there are no four-year
rules.
I strongly
recommend that you have very good records to back up your calculations. I would
have copies of all payments, transcripts, and bills from the accredited
college/yeshiva. Make sure your yeshiva receipt makes it clear that it is for
college. I would recommend that yeshiva receipts and records only use legal
names and no Hebrew words. Remember, the
It is clear that
the frum lifestyle presents special
situations and challenges. These are some of the most common income tax credits
that can save families a bundle.
Eli Pollock can be reached at elipollock2@yahoo.com.
