At tax time, being a parent comes with certain perks. For example:
The Child Tax Credit offers up to $1,000 per qualifying child. Qualification criteria include being under the age of 17 at the end of the tax year, being claimed as your dependent, and living with you for more than half of the year. (Learn more here from the IRS [PDF file, Adobe Acrobat required].)
The Child and Dependent Care Credit can be very valuable, if you and your child qualify. It's designed to offset some of the cost of paying someone to care for your child so that you can work (or look for work) and amounts to up to 35% of your qualifying expenses. The child must be younger than 13 when the care is provided, and the caregiver cannot be the child's other parent. Income restrictions apply, too, along with other rules. Note, too, that this credit is available if you pay someone to care for a non-child dependent, too, such as an elderly parent. (Learn more here.)
The Earned Income Tax Credit can be a great help to low-income working folks -- but it looks so complicated and intimidating that many never take advantage of it. It's estimated that one-fifth of eligible taxpayers don't claim it, and among those who do, the average value is $2,200. You don't even need children to qualify, though the credit's maximum value rises along with the number of children you have. (Learn more.)
The tax credits mentioned above are available to both single and married parents. It's important to make that distinction, because while single parents have many of the same breaks as married parents, there are some they miss out on.
Singling Out Singles
Single parents are not an insignificant portion of our population. In 2009, they numbered nearly 12 million, and in 2011, 27% of all American children lived with just one parent.
If you're a single parent and you're filing tax returns as "Single," you should consider switching to "Head of Household" status, as it can reduce your taxes. The standard deduction is higher for heads of households, for example. Some of the criteria to qualify for the status include your providing more than 50% of the financial support for your household and your children having lived with you for more than 50% of the year.
Heads of households in 2011 can apply exemptions of $3,700 for themselves and each qualifying child against their taxable income. Have two kids? That's a total of $11,100 by which you may be able to reduce your taxable income. (Note that this exemption is available once per child, so two parents living separately may not each claim it.)
In plenty of ways when it comes to the tax code, single parents get what they might reasonably see as a raw deal.
Consider, for example, the home sale exclusion. It offers a person the chance to exclude up to $250,000 of the qualifying gain from the sale of a home from taxes. That's potentially a huge tax break, and for married couples, it's doubled to a $500,000 exclusion. But a single parent, who might head a household of three or four or more people -- more individuals than a childless married couple -- can still only enjoy a $250,000 exclusion, at most.
There are also many smaller items that can really add up. Consider, for example, that you can "phase out" of being eligible for many credits and deductions as your income rises. The limits for married couples filing jointly are generally far higher than for singles and heads of households, even though single parents may be supporting bigger families and have very similar expenses to married couples, without the common benefit of a double income. Of course, there can be pluses along with minuses. A single filer with a lower income than a married couple can end up with a higher dependent credit, for instance.
While the tax system may not seem completely fair, it's what we're stuck with until changes are made. No matter what your tax status is, take a little time to make sure that you're taking advantage of all the breaks available to you. It might even be worth spending a little money to hire a tax pro, if he or she can save you a lot of money.
Longtime Motley Fool contributor Selena Maranjian holds no position in any company mentioned. Click here to see her holdings and a short bio. You can follow Selena on Twitter: @SelenaMaranjian.
10 Fat-Chance Tax Deductions
Tax Time for Single Parents Can Be Doubly Aggravating
A couple who owned two struggling dry-cleaning businesses couldn’t get a loan from their bank because they were judged to be a bad credit risk. But they worked out a deal to regularly overdraw their account and then satisfy the overdraft after the bank called them. This odd financing method caused them to incur more than $30,000 a year in overdraft charges, which they deducted as a business expense.
This didn’t wash with the Tax Court, which nixed the write-off, saying the charges were unreasonably high. Not surprisingly, the pair wound up filing for bankruptcy.
A woman with a rare blood type made more than $7,000 in a year as a blood plasma donor. She sought to offset the income by claiming a depletion deduction for the loss of both her blood’s mineral content and her blood’s ability to regenerate.
While depletion is a proper write-off for firms that remove natural deposits of minerals such as coal and iron ore from the ground, the Tax Court decided that individuals cannot claim depletion on their bodies.
A tax lawyer spent more than $65,000 in a year on prostitutes and pornographic materials. He deducted the total as a medical expense, making a novel argument that cited the positive health effects of sex therapy.
The Tax Court red-lighted his write-off, saying that his conduct not only was illegal, but also wasn’t for the treatment of a medical condition.
After a job transfer, a worker relocated his family to a new state. But his wife didn’t like living there and returned home with the kids. When he visited over a holiday weekend, he discovered another man had been living there with his wife. He and his wife quarreled, and she left the house. While she was out, he put some of her clothes on the stove and set them on fire. The conflagration spread and burned down the house.
The husband claimed a casualty loss deduction, but the Tax Court said no, reasoning that allowing him to deduct a loss from a fire he set would violate public policy.
A pro football player who was in the middle of negotiating a contract extension got into an altercation with a lady friend. She ended up contacting the cops and filing a criminal complaint against him. The team told him that if the matter became public, he would be cut or traded. He agreed to pay the woman $25,000 to keep things quiet, and he got a four-year contract extension.
But he didn’t get a tax deduction for the payment, because the Tax Court said the claim arose out of a personal relationship that had nothing to do with pro football.
The manager of an Yves Saint Laurent boutique was required to purchase and wear the designer’s clothing as a condition of her job to project the image of an exclusive lifestyle. She deducted the cost of the clothes as an employee business expense because she only wore the outfits at work. In her view, the clothes were too dressy for her simple, everyday lifestyle.
Nevertheless, a court denied her deduction because the clothes were suitable for wear outside of work, even though they were not her taste.
In an effort to drum up business from banks, a repo firm sponsored a bus trip to Las Vegas. Although employees talked informally with their collection contacts on the ride to Vegas, no formal business meetings were scheduled, and everyone spent most of the weekend gambling. The trip was a rousing success because the repo firm got a lot more business from the attendees.
The company was less successful in the Tax Court, which denied the deduction for the junket because the business discussions were an insubstantial part of the trip.
A partner in a law firm met every day with his colleagues at lunch to discuss the firm’s business, such as case assignments and settlements. But the IRS balked when he asked Uncle Sam to pick up part of the tab.
The Tax Court came down on IRS’ side, saying that the cost of the meals was a non-deductible personal expense, even though business was discussed. The moral of the story is that while the partner can have his cake and eat it for dessert, he can’t get a subsidy from other taxpayers for his meals.
An airline employee needed to get to New Orleans but was stranded by heavy fog. He worked out a great deal with a rental car company where he paid nothing for a car that the company needed driven to New Orleans.
Unfortunately, he wrecked the auto in Mississippi and had to pay for the damages. He tried to deduct the payment as a casualty loss, but the Tax Court denied his write-off because he wasn’t the owner of the vehicle.
A couple paid a builder to construct their dream home. Not long after they moved in, they discovered a series of problems with the house, including the foundation, that made living there a nightmare. They claimed that the builder defrauded them and deducted a large theft loss on their tax return.
But the Tax Court denied the deduction, saying that although they were victims of poor workmanship, they weren’t victims of fraud.
Most real estate agents and brokers receive income in the form of commissions from sales transactions. You're generally not considered an employee under federal tax guidelines, but rather a self-employed sole proprietor, even if you're an agent or broker working for a real estate brokerage firm. This self-employed status allows you to deduct many of the expenses you incur in your real estate sales or property management activities. Careful record keeping and knowing your eligible write-offs are key to getting all of the tax deductions you're entitled to.
The Educator Expense Tax Deduction allows teachers and certain academic administrators to deduct a portion of the costs of technology, supplies, and certain training. Here’s what teachers need to know about taking the Educator Expense Deduction on their tax returns.
Have you been self-employed less than a year? If you’re just starting out, it’s possible you worked at a job earlier in the tax year before making the switch to self-employment, or you’re working multiple jobs. In this case, you may have more than once source of income you’ll need to report on your income tax return.
Heading off to college to broaden your horizons is exciting, but funding your education via scholarships? That's even better. Scholarships often provide a path to education that might not be feasible otherwise, which is why the Internal Revenue Service (IRS) can be generous in minimizing students' tax obligations. But sometimes scholarship money does count as income, and it’s better to find out now if your scholarship adds to your tax liability than to have a surprise later. Here’s how to decode your scholarship taxation.