“Children are a heritage from the Lord, offspring a reward from him.” Psalm 127:3
Children are indeed a gift from the Lord. To offset some of the financial costs of raising them, the new tax law may be able to help. Enacted at the end of 2017 this law provides a great tax benefit to many homeschool families. Below I highlight the change in the law from 2017 to 2018 and three ways you can utilize the potential tax savings.
Law in 2017
In 2017, the child tax credit let you reduce your federal income tax bill by up to $1,000 for each qualifying child under the age of 17 you claim as a dependent. The child must be your daughter, son, foster child or adopted child but can also be a grandchild or descendant of one of your siblings. You were able to claim an exemption of $4,050 per person and the standard deduction was $12,700.
The income limit for married people filing a joint return was $110,000 of modified adjusted gross income. If you made less, you would receive the full credit. If you made more, the credit would begin to phase out by $50 less in credit for every $1k over the $110,000.
Joe and Rhonda have five children. Their modified adjusted gross income (MAGI) is $120,000. They have $17,000 of deductions and $28,350 (7 people x $4050) of exemptions dropping their taxable income to $74,650. They owe $14,401 of federal tax. Since they are over the $110,000 MAGI limit, their child tax credit is phased down to $500/child for a total credit of $2500 dropping their federal tax bill to $11,901.
Law in 2018
The new law increased the child tax credit to $2,000 for each qualifying child, eliminated personal exemptions, increased the standard deduction for married filing jointly to $24,000, lowered the tax brackets for some and increased the income threshold to receive full benefit of the credit from $110k to $400k.
Let’s look at how Joe and Rhonda would do under the new law.
Let’s assume Joe and Rhonda make the same modified adjusted gross income in 2018 ($120,000). They now get the standard deduction of $24,000 but lose the personal exemptions which makes their taxable income $96,000 ($120,000-$24,000). They will owe $12,999 before applying the tax credit. Since they have 5 children, they pick up an additional $10,000 child tax credit (5 X $2000) which drops their federal tax bill to $2,999! This equates to $8,902 less in tax paid!
Three Ways to Utilize Tax Savings
- Build your emergency fund. Having 3-6 months of living expenses in a savings account is crucial for a solid financial foundation.
- Pay down debt. Use these savings to pay off/down credit cards, student loans, auto loans or your mortgage.
- Fund a Roth IRA/Convert IRA dollars to Roth. Roth IRA provides tax-free growth and if withdrawn after 59.5 it can all be withdrawn tax-free. Plus, Roth principal is available penalty-free for withdrawal. Withdrawal of earnings before 59.5 would be subject to a 10% penalty.
Depending on the specific situation the new child tax credit can provide a great opportunity to save, pay down debt or give more to God’s Kingdom!
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.
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For more great articles about teaching your children how to manage their money and more homeschooling information be sure to check out the Teach Them Diligently Blog.
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