A new tax law takes effect for 2021 that provides big handouts for families with children. The child tax credit is going to $3,000 ($3,600 for those five and under), and half of it will be coming in monthly checks! That is automatic. There is also a significant increase in the child care tax credit. That is what I will be discussing.

The Old Child Care Tax Credit

According to the prior law, you got a 20% credit for the cost of care in preschool and day camp for under age 13. The maximum costs considered were $3,000 for one child and $6,000 for two or more. You could therefore save a maximum of $1,200. ($6,000 x 20% = $1,200). This credit was non-refundable. That means that if your tax liability was $500 and your tax credit was $1,000, your taxes went down to zero but you did not get any money back. Therefore, you only saved a total of $500. The concept is that daycare is a “work expense” to allow woman to go to work.

It seems like the last tax year never ended; it just flowed into this year. Of course, with COVID, last year has been pretty crazy. In fact, in addition to our health, schools, simchas, and shuls, the virus has affected our taxes.

COVID Tax Issues

First, two minor points: 1) You did not have to take money (RMDs) out of your IRAs and retirement accounts in 2020. 2) You also get to claim charity of $300 if you do not itemize. Nothing overwhelming there.

In a few months, we will be filing 2020 taxes. Boy, what a year this has been! Let’s run through the important things you should be looking into.

First, assuming that Biden has actually won, we can fairly assume he will raise taxes, meaning it is better to earn money in 2020 than it will be in 2021. But charity deductions might not be more valuable in 2021. One thing I read said that under Biden charity might be capped at a 28% deduction, making charity more valuable in 2020! You can read lots of possible scenarios of a new tax law on the internet.

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%).

Summer is synonymous with vacations. And vacation means going somewhere. Folks, it’s a beautiful world out there, and exploring it expands our horizons and makes us appreciate the wonders we have been given. Being able to hit the road as a family is positive in many ways.

and offers invaluable lessons for children. This includes showing gratitude to our Creator for the glorious world we have been given. Another is the positive lesson that we can be frum anywhere and that mitzva observance does not hinder our aspirations and opportunities. Travel also offers such wonderful memories – and some great family photos – suitable for framing.

In addition to great family vacations, here’s an alternative travel idea: A parent might take one or two children on their own cross-country camping trip. This could serve as a reward for good school performance or any other goal. Imagine the child’s excitement at earning a Sunday-through-Friday trip with Dad to visit some of the national parks out west. It is not expensive (with credit card points) and can totally turn a life around.

About 20 years ago, under the Clinton administration, the country took a turn toward paying for college – that is, helping to pay for it via an income tax credit. This was named The Hope credit, and it allowed undergraduate students to save taxes based on college tuition. However, you could only claim the credit for two tax years. Our attitude at the time, therefore, was to not delve into complicated issues. With the many questions surrounding yeshivas and Israel programs, we simply waited to use the credit until the student was attending a “real college,” when there were no doubts.  

Ten years ago, however, the tax credit was renamed the American opportunity tax credit (AOTC) and extended to four tax years. This forced some important questions and issues, especially in the frum world. So, this article is 10 years overdue – but better late than never.