How Can I Get My Child Tax Credit Early?

parents with their two children

There have been many different programs made available by the government to help people get through these tough times. With the Covid-19 pandemic, there has been a record number of people on unemployment, and many small businesses and self-employed people had a serious loss of income. 

The government has provided benefits in the form of stimulus payments, adding an additional federal amount to people state unemployment and they have given many tax breaks as well.

This article will discuss the major changes to the Child Tax Credit through the American Rescue Plan. These changes may not only give taxpayers with qualified dependents a much larger amount, but it will also give them a portion of the money earlier. The American Rescue increased the amount received per qualified child from $2000 to $3000 or $3600 per child under the age of 6. It also makes this credit fully refundable. 

I discussed this increase in the amount possibly credited to taxpayers in a previous article.  Please refer to our June 2nd article on the Child Tax Credit for more information. The reason I am coming back to this topic today is to further discuss the efforts that the IRS is taking as we speak to disburse a portion of this early over the next six months to taxpayers in need.

Starting July 15, 2021, about 36 million American families will start receiving checks from the IRS. Taxpayers who are eligible for this credit will receive up to $1800 broken up equally over the next six months. They will be receiving half of the credit that they qualify for and then they can claim the other half when they file their tax return for 2021. This is a temporary change just for the 2021 tax year.

To qualify for advance Child Tax Credit payments, you, and your spouse if you filed a joint return must have:

  • Filed a 2019 or 2020 tax return and claimed the Child Tax Credit on the return: or
  • Given us your information in 2020 to receive the Economic Impact Payment using the Non-Filers: Enter Payment Info Here tool; and
  • A main home in the United States for more than half the year (the 50 states and the District of Columbia) or file a joint return with a spouse who has a main home in the United States for more than half the year; and
  • A qualifying child who is under age 18 at the end of 2021 and who has a valid Social Security number; and
  • Made less than certain income limits.

The IRS will use information that taxpayers have already provided to determine who qualifies and will automatically enroll you for advance payments. There is nothing the taxpayer must do to get these advance payments.

 

What Are the Income Limits For the Child Tax Credit?

Not all taxpayers with qualified children will receive the higher child tax credit. The taxpayers who will receive the maximum amount will be taxpayers who make $75,000 a year or less if filing single, $112,500 or less if filing head of household, and $150,000 or less if filing a joint return or are qualified widows or widowers. Taxpayers who make more than these amounts will receive a phased-out amount. They will receive $50 less for every $1000 of income over the thresholds until the payments are phased out for people who earn roughly $20,000 more than the salary thresholds. 

The IRS has set up a tool on their website where a taxpayer can see if they qualify. For parents that qualify payments can be up to $300 for children under six and $250 per month for each child between 6 & 17.

If you do not qualify because you earn more than the maximum income allowed for the credit then you still may qualify for the original Child Tax Credit. This Child Tax Credit of $2000 is available to single parents who earn up to $200,000 or married couples who earn up to $400,000. If you earn higher than these amounts, then you will not qualify for any Child Tax Credit.

Since the IRS is relying on previous years’ filings, they may not have information for some people that qualify. Low-income households that are not required to file tax returns may fall through the cracks. If you were not required to file in 2020 or 2019 and qualify for this credit the IRS has set up a Child Tax Credit non-filers tool. 

Non-filers will need to provide personal information such as their date of birth, as well as their social security numbers for themselves and the qualified child. 

 

What Is a Qualifying Child for the Child Tax Credit?

A qualifying child is a child who meets the four IRS requirements to be a dependent for tax purposes. These six requirements are the relationship, age, residence, support, joint return, and citizenship.

Relationship: The child must be a son, daughter, stepchild, foster child, brother, sister, half-brother, half-sister, stepbrother, stepsister, or a descendent of any of them.

Age: To meet this test a child must be younger than the taxpayer (or spouse if filing jointly) and meet the following conditions.

  • Younger than the age of 19 at the end of the year
  • Younger than age 24 at the end of the year and a full-time student
  • Any age if permanently and totally disabled (does not need to be younger than the taxpayer)

Residence: The child must live with the taxpayer more than half of the year. A child who is born or dies during the year qualifies if the home was the child’s home the entire time the child was alive. A child is considered to live with a taxpayer when at a hospital following birth, or temporary absences due to special circumstances such as illness, education, business, vacation, or military service.

Support: The child cannot provide more than half of their own support.

 

How Do You Opt-Out of Receiving the Advance Payments?

While this seems like how stimulus payments were distributed there is one major difference. With stimulus checks, if you received more than you were entitled to you did not have to pay the money back. With the Child Care Tax Credit that is not the case. If you are not eligible when you file your 2021 tax return, then you will have to repay the amounts advanced to you. This could happen if you had an increase in income from last year where you are now over the income threshold or if your qualified child is now older than the age limits. Also, a lot of marital situations changed during this rough year.

The IRS is doing all their qualifications from old information. They are using the information provided on 2020 tax filings. If that year has not been filed or processed, then they are using 2019. If you are a taxpayer that no longer qualifies it is important that you opt-out of these payments or you could have a hefty tax bill, come filing time.

The IRS has set up a tool on their website where taxpayers can opt out of receiving these payments. This tool will allow people who either do not want or no longer qualify for the credit to unenroll before the first payment is made on July 15th.  This tool can be used by families if they have internet access and a smartphone or computer. 

The IRS is planning on updating this portal to allow people to see payment history and change banking information or mailing addresses. They are also working on updating the tool to allow taxpayers who have had children in 2021 or if the child has aged out of qualification to update that information so they can begin receiving the advance or to correct the amount received.

If a taxpayer chooses to opt out they must notify the IRS before set deadlines for each payment. You must opt out by June 28th to skip the 1st payment. If they miss this opt-out before the 1st payment, then they can still opt-out prior to the next payments.

In conclusion, this is another step taken by the government to aid struggling families and to influx money back into our economy sooner than later. Vice President Harris was quoted as saying, “The proudest moment that I have experienced in this position was when President Joe Biden signed the American Rescue Plan into law. Because through tax credits and food assistance and housing assistance and health care coverage and direct checks the American Rescue Plan will lift half of America’s children out of poverty.” 

As much good as this will seem to do, I do have one reminder to point out where people need to be careful: If you no longer qualify for the tax credit, then it is especially important that you opt out. If you do not, then you can see yourself with a tax bill you may not be able to afford come tax time. If you can afford to pay it that is always best but if you can not you do need to remember that you have a lot of rights when it comes to owing delinquent taxes.  

If you find yourself in this tax situation reach out to a true tax professional for assistance to make sure your rights are enforced. In situations like this Enrolled Agents and CPAs have the educational background and licensing to best represent you.

 

What Education Expenses Are Tax Deductible?

woman taking online courses

For many Americans, their years spent in college are a time when every little extra dollar counts. Fortunately, the government sees this, but they also value higher education so much that there are many different exclusions of income, tax deductions, and tax credits that can be utilized that are associated with different aspects of cost spent on education. 

This article will cover some of the savings programs that parents can utilize that have tax benefits. Then we will go through some of the exclusions and deductions from college expenses that can be utilized on the return to reduce taxable income as well as the different credits that can reduce the actual tax debt owed or maybe even get you a bigger refund. We all know that any sort of tax refund especially when things are tight helps.

 

Saving For Your Child’s College Expenses

There are many different programs and types of savings accounts that have specific tax benefits if the distributions from that account are for higher learning.

Education Savings Bond Program

A taxpayer may exclude all or part of the interest received on the redemption of qualified US savings bonds during the year if the taxpayer uses that interest to pay for qualified higher educational expenses during the same year.

Coverdell Education Savings Account

A Coverdell ESA is a trust or custodial account created or organized in the United State only for paying the qualified education expenses of the designated beneficiary of the account. While there is no tax deduction for contributions, earnings are tax-deferred. You can exclude distributions from a Coverdell ESA from income up to the number of qualified education expenses for the year, adjusted for other benefits received.

Qualified Tuition Programs

A qualified tuition program is a program set up to allow the taxpayer to either prepay or contribute to an account established for paying a student’s qualified expenses at an eligible educational institution. A state, a state agency, an instrumentality of a state, or an eligible educational institution can establish and maintain a QTP.

All these savings mechanisms can help you set aside a nice nest egg for your child’s college education while avoiding taxation. One major qualifier of each one is that the distributions must be spent on qualified education expenses.  

The qualified educational expense for these programs is the amounts paid for tuition, fees, books, supplies, and equipment required for enrollment or attendance to an eligible educational institution. They also include the reasonable costs of room and board for a designated beneficiary who is at least a half-time student. These are the qualified expenses for this type of savings program but remember different tax breaks have different criteria for what is considered a qualifying expense.

Another big way to save money while paying for college is by receiving scholarships and fellowships. These scholarships can provide a path to higher education that may not be feasible by other means. The government values this opportunity of higher education, so they provide a tax break on the income of a scholarship used for qualified educational expenses

When it comes to scholarships, qualified educational expenses included are tuition and fees to enroll at or attend an educational institution and any fees, books, supplies, and equipment required for courses at the educational institution. Amounts for room and board do not qualify for this exclusion. 

Another way some parents help their children pay for school is by doing early withdrawals from their IRAs. Typically, when you do an early withdrawal before the age of 59 ½ you must pay a 10% additional tax.  However, if you withdraw the funds to pay for qualified college expenses you can avoid the additional 10% tax. 

The educational expenses must be for yourself, your spouse, you or your spouse’s child, foster child or adopted child, or you or your spouse’s grandchild. Qualified educational expenses in this case include tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution.

 

What Educational Credits Can I Claim on my Taxes?

Outside of some income being used for paying for educational expenses being excluded many credits can be applied to your filing. A tax credit is designed to reduce taxable income. The amount of the credit that you qualify for comes right off the total payable tax. Sometimes these credits can turn your tax bill into a refund. 

There are two major education tax credits that students can utilize to reduce their tax bill: the American Opportunity Tax Credit & The Lifetime Learning Credit. A student or the parent of the student can only claim one of these credits for that student on a tax filing. If you have more than one child, you can claim either of the credits for each child but not both.

The American Opportunity Tax Credit

This credit could reduce your tax bill by up to $2500 if you paid that much in qualified education expenses. You can claim 100% of the first $2000 that you spent on qualified educational expenses. After that, you can add 25% of the next $2000 spent for a total of $2500. 

To qualify for this, you must make under $180, 000 if filing Married Filing Jointly and $90,000 if filing Single, Head of Household or Qualified Widower. This is a partially refundable credit. It can be refundable up to 40% so up to $1000.

The Lifetime Learning Credit

This credit could reduce your tax bill up to $2000 if you paid for students enrolled in eligible educational institutions. The Lifetime Learning Credit is computed on a family-wide basis. The amount of the Lifetime Learning credit is up to 20% of the first $10,000 of qualified education expenses paid for all eligible students. 

To qualify you must make under $138,000 if Married Filing Jointly and $69.000 if filing Single, Head of Household or Qualified Widower. This is a non-refundable credit.

Qualified living expenses for these two credits must be required for enrollment or attendance at an eligible educational institution and include tuition and required enrollment fees. Expenses include amounts paid to the institution for course-related books, supplies, and equipment. Room and board, insurance, medical expenses, transportation, and other similar personal expenses do not qualify.

 

Can I Use Educational Expenses as a Deduction?

The American Tax Credit and the Lifetime Learning Credit will give you the biggest tax break available but if you do not qualify there are other possibilities to save some money. You still may be able to claim a tax deduction for college tuition and fees for yourself, your spouse, or your dependents. This education deduction can be worth up to $4000. 

You can get the full amount of your income is under $65,000 on a single return or under $130,000 if you file jointly. The write-off for singles drops to $200 if your income is more than $65,000 and it disappears when your income passes $80,000. For married couples, the max is $2000 when income passes $130,000 and it is wiped out when income exceeds $160,000.  

Qualified expenses that can be used for this deduction are tuition, student fees, and required expenses for course-related books, supplies, and equipment. Room and board, insurance, medical expenses, transportation, and similar personal living expenses do not qualify. 

If you are self-employed generally can deduct the cost of work-related educational expenses. This will reduce the amount of income subject to both the federal income tax and self-employment tax. The education must be required to keep your present salary, status, or job or to maintain or improve skills needed in your present work. 

Expenses cannot be used in the education is needed to meet the minimum educational requirements of your present trade or business or if the expenses are for a program that will qualify you for a new trade or business. The qualified expenses that can be written off by self-employed individuals are tuition, books, supplies, lab fees, certain transportation, and travel costs.

With all these exclusions, credits, and deductions you cannot double-dip. You cannot deduct tuition and fees if:

  • You also deduct those expenses for another reason (e.g., as a business expense);
  • You or anyone else claims an American Opportunity or Lifetime Learning Credit for the same student in the same year.
  • The expenses are used to figure the tax-free portion of the 529 plan or Coverdell ESA distribution.
  • The expenses are paid with tax-free interest on U.S. savings bonds; or
  • The expenses are paid with tax-free educational assistance, such as a scholarship, grant, or assistance provided by an employer.

In conclusion, as you can see there are a lot of opportunities to save from some of your expenses derived from education. As you can see there are very definitive qualifications and distinct benefits to all these different credits, deductions, and exclusions. 

That is why it is important to reach out to a true tax professional for assistance, so you do not miss out on an opportunity to use them or filing them incorrectly. An IRS Enrolled Agent or CPA has the educational background and licensing to properly advise you and legally save you the most money possible.

 

How Does the Solar Tax Credit Work?

installation of residential solar panels

With the science showing indications that there is a necessity to change the way energy is provided, many people are making the change towards renewable energy

Renewable energy is useful energy that is collected from renewable resources, which are naturally replenished on a human timescale, including carbon-neutral sources like sunlight, wind, rain, tides, waves, and geothermal. These forms of renewable energy generate energy without producing any greenhouse gas emissions from fossil fuels and reduce some types of air pollution. Also, they can help pull our country away from dependence on imported fuels. 

With all this necessary benefit the government has put forth tax credits to incentivize people to utilize renewable energy and make investments into their properties to make their residences more energy efficient.  These incentives are coming in the form of tax credits. 

One of the most popular and the ones we will discuss further today is the Solar Tax Credit. I will start off by explaining exactly what the solar tax credit is and the benefits it provides. I will also give a little bit of the history of this credit.

 

What Is a Tax Credit?

A tax credit is a sum that can be subtracted from the total payable tax and offsets the overall liability. If an individual is charged more tax, then the excess tax is given as a tax credit which can be adjusted against future liabilities. So, if you owe $1000 in taxes and you qualify for a $1000 tax credit your net liability would be zero. It is an actual dollar to dollar reduction.

 

What is the Solar Tax Credit?

The Solar Tax Credit is also known as the investment tax credit and allows you to deduct 26% of the cost of installing a solar energy system from your federal taxes. The Solar Tax Credit was first introduced in 2005 as a 30% reimbursement credit. The credit was a part of the Energy Policy Act of 2005 during the Bush Administration. It has been extended annually since then up to 2015. 

In 2015 it got a long-term extension with a dropdown. The plan dropped the credit down to 26% in 2020, 22% in 2021, and down to zero after 2021. Fortunately, new legislation signed last year would keep the credit at 26% for 2021 and 2022 then drop it to 22% in 2023. This means that you are reimbursed 26% of the actual cost of the full cost of purchasing and installing the solar power system. 

Since this credit was introduced the U.S. solar industry has grown by more than 10,000% not only helping our environment but it has also helped create hundreds of thousands of jobs and investing billions in the economy in the process.

 

Do I Qualify for the Solar Tax Credit?

The major form of solar energy that can be installed and qualify for reimbursement through credit is solar panels. Solar energy property is recognizable for the solar array on its roof or on its grounds. They are typically black panels that are filled with solar PV &photovoltaic) cells. These cells convert sunshine into useable electricity. 

The tax credit is not only good for personal taxes and residential property it can also be used on a business filing with a commercial property. If you are trying to utilize the credit on a personal tax return the property must be one that you own not one that you rent. It must be a property that you live in for at least part of the year, so vacation homes are eligible. These residences can include a house, a houseboat, condominium, cooperative, mobile home, and prefabricated homes. 

Also, the solar equipment must be owned not leased. If a new homebuyer buys a newly built home with solar and owns the system outright, the homeowner would be eligible for the credit the year they move into the house.

Solar panels are not the only equipment that qualifies for the tax credit. Geothermal heat pumps, small wind turbines, fuel cell property, energy-efficient heating and air conditioning systems, water heaters, and biomass stoves also qualify. If this equipment or solar panels are used to heat a swimming pool or hot tub they do not qualify. 

Rental properties that are not lived in throughout the year by a taxpayer also do not qualify. But if you live in the house part of the year and rent it while you are not there it will qualify. If you live in the house part-time you will have to reduce the credit for a vacation home or rental to reflect the time when you are not there. If you live there for 3 months of the year, then you can claim 25% of the credit.

Unfortunately, the solar tax credit is a nonrefundable credit. This means if the credit is more than the taxes owed the remainder will not be sent out as a refund as some other credits do. The credit can be carried back 1 year and forward 20 years. This means if you had a tax liability last year, but you do not have one this year you can still claim the credit.

 

How Do I File For The Solar Tax Credit?

To claim the solar tax credit, you must complete an IRS Form 5695 and include the result on your IRS schedule 3 on the 1040 form.  This form calculates tax credits for a variety of qualified residential improvements. These steps as seen on energysage.com break down how to fill out this form.  

  • First, you will need to know the qualified solar electric property costs. That is the total gross cost of your solar energy system after any cash rebates. Add that to line 1.
  • Insert the total cost of any additional energy improvements, if any, on lines 2 through 4, and add them up on line 5.

filing for a Solar Tax Credit step 1

  • On line 6, multiply line 5 by 26%. This is the amount of the solar tax credit.

filing for a Solar Tax Credit step 2

Note: this is from the 2019 form when the ITC was still 30%.

  • Assuming you are not also receiving a tax credit for fuel cells installed on your property, and you aren’t carrying forward any credits from last year, put the value from line 6 on line 13.

Now you need to calculate if you will have enough tax liability to get the full 26% credit in one year.

  • Complete the worksheet on page 4 of the instructions for Form 5695 to calculate the limit on tax credits you can claim. If you are claiming tax credits for adoption expenses, interest on a mortgage, or buying a plug-in hybrid or electric vehicle, you will need that information here. (For this example, the total federal tax liability is $7,000.)

screenshot of the Solar Tax Credit worksheet

  • Enter the result on line 14 of Form 5695. Review line 13 and line 14, and put the smaller of the two values on line 15.
  • If your tax liability is smaller than your tax credits, subtract line 15 from line 13, and enter it on line 16. That’s the amount you can claim on next year’s taxes.

filing for a Solar Tax Credit step 3

Add the credit to Schedule 3/Form 1040.

The value on line 15 is the amount that will be credited to your taxes this year. Enter that value into Schedule 3 (Form 1040 or 1040-SR), line 5, or Form 1040NR, line 50.

filing for a Solar Tax Credit step 4

The steps above outline all you need to do to have 26% of the cost of your solar panel system credited back to you! If you did energy efficiency improvements to your home in the same year, you may also need to complete page 2 of Form 5695. Either way, be sure to include Form 5695 when you submit your taxes to the IRS.

In conclusion, if you are ever thinking about installing any of this equipment to make your home more energy-efficient now is the time. It seems that this credit keeps on getting extended, but it has been reduced so you never know what the future will bring. At this point, it expires in 2024. 

Obviously, for some people it is just not affordable but if it is the 26% credit and the savings over time in reduced energy bills seem to make it a great investment. Currently, estimates show the average national cost to purchase and install panels on a residence is $16,860. This would result in a tax credit of $4618. 

This is still an excessively big investment so the next thing to consider is the savings on energy cost. Studies show that solar panels will pay for themselves after three years. Also, some states and counties offer additional credits as well. In some areas, if your equipment produces excess electricity that you do not use it can be sold to your electric company. 

Of course, one of the most important reasons to go solar is so that you can do your part for our environment. With the present administration and their push for more green energy, the credit could get better but acting now you know you will get huge savings.