In a number of situations, a family might have only one income. One parent might stay home to raise the children, or a single parent might be raising children alone due to divorce or widowhood. No matter the situation, it can be tough to make ends meet with only one income. When you consider the tax problems that could arise, it can be even more challenging.
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To make things a bit easier this tax season, get ahead of potential tax problems and stop them before they start. Here are the biggest tax questions and single-income family tax tips so you can keep your tax burden as low as possible.
1. Can We Claim the Child and Dependent Care Credit?
When one spouse does not have income, you cannot claim the child and dependent care credit. This credit offsets childcare expenses so that both parents can work and/or look for work. If one parent stays at home to care for the children, you cannot claim this credit. If you are a single parent with custody of your children, however, you can claim this credit if you have income.
To claim this credit, you must understand who qualifies as a dependent. In the words of the Internal Revenue Service, a qualifying individual for this credit is your dependent qualifying child who is under age 13 when the care is provided.
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2. Can We Claim the Child Tax Credit?
According to the IRS, for the tax year 2022, the child tax credit has been reduced back to $2,000 per qualifying child. This is the same amount the Child Tax Credit was before the temporary increase to the credit for tax year 2021 of $3,000 or $3,600 per child, which was part of the American Rescue Plan.
The Child Tax Credit is an important credit because, unlike a deduction, which reduces the amount of your taxable income, a tax credit reduces the amount of the total tax bill. For example, if you owe $8,000 in income tax and you have two children who were under age 17 at the end of 2022, you can apply this credit of up to $2,000 per child to reduce the amount of tax you owe to possibly $4,000.
Not many one-income family tax credits are available, but this is one that applies to all families with children. To apply for this tax credit, each child must qualify, according to the following:
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Be under age 17 at the end of 2022 and a U.S. citizen, U.S. national or U.S. resident alien
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Be your son, daughter, stepchild, foster child, brother, sister, stepbrother or sister, half-brother or sister — or a descendant of one of those people
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Claimed as your dependent on your tax return for 2022
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Dependent provided no more than 50% of their financial support in 2022
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Dependent lived with you for more than six months out of 2022
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Dependent did not file a joint return with spouse for 2022 or file to claim a refund of withheld income tax or estimated tax paid
If all of the above qualifications are met and your annual income does not exceed $200,000 (or $400,000 if married, filing jointly) you will qualify for the full amount of the Child Tax Credit.
Parents and guardians with higher incomes may be eligible to claim a partial credit.
3. Can We Use a Dependent Care FSA?
With a dependent care flexible spending account, or FSA, you can make pre-tax contributions, which lowers your taxable income. You can use the money to pay for qualified childcare expenses. Unfortunately for the single-earner family, this money can only be used if the care was provided so that you could work, look for work or go to school full-time. If one parent stays at home, you cannot take advantage of a dependent care FSA.
4. Can a Non-Income Earning Spouse Still Save For Retirement?
In most cases, you must have earned income in order to contribute to a traditional or Roth IRA. Many single-income families assume that the breadwinner is the only spouse who can contribute to one of these retirement accounts because the non-working spouse doesn’t have any earned income, according to Thomas Walsh, an Atlanta-based certified financial planner with Palisades Hudson Financial Group. The IRS makes an exception in this case, however.
“In order to promote retirement savings from both spouses in the home, the IRS created the spousal IRA,” Walsh said. A working spouse can contribute up to $6,000 a year — or $7,000 if you are over 50 — to an account for the benefit of the non-working spouse. You have until the tax-filing deadline to make a contribution for the previous year, and you can deduct the contribution from your taxable income on your federal tax return if you meet certain requirements.
5. How Can We Get the IRA Contribution Deduction?
If only one spouse has income, that income must be enough to support the deduction of your IRA contribution. That means that the combined contribution you make to your IRAs must not be more than the working spouse’s taxable income.
6. Can We Get the Saver’s Credit?
Low- to moderate-income taxpayers can take advantage of the saver’s credit, a tax credit for contributing to a retirement account, such as a 401(k) or IRA. The credit is worth up to $4,000 for married couples filing jointly.
To qualify, married couples filing jointly need an AGI of $44,001-$68,000 to get a credit for 10% of their retirement contribution. To qualify for the maximum credit of 50% of your contribution, your joint AGI cannot be more than $41,000. If you file as head of household, you qualify for the maximum credit with an AGI of less than $30,750. For other filing statuses, including single, married filing separate and qualifying widow, you’ll get the full credit with an AGI under $20,500 and a partial credit with AGI up to $34,000.
7. What’s the Best Way To File Our Tax Return?
For most married couples, the status of married filing jointly can result in the lowest tax payment. Even if only one spouse works, you should consider filing jointly. Filing separately allows you fewer deductions, and you cannot file as head of household if you are married. Moreover, single-income versus dual-income taxes will result in qualifying for different deductions. Consulting with a tax professional can help you choose the best filing status for your unique financial situation.
8. Shouldn’t We Use Married Filing Separately?
Filing separately while you’re still married can create problems at tax time, according to David Du Val, the vice president of customer advocacy at TaxAudit, a tax audit defense firm.
“Ninety-five percent of the time, you will get a bigger refund or owe less if you file jointly,” Du Val said. So, if you’re separated or living apart, you still might want to file a joint return to get the tax benefits. Or you might qualify for head of household if your spouse didn’t live with you for the last six months of the year, you paid more than half the cost of keeping your home and your dependents lived with you for most of the year.
9. How Are Alimony and Child Support Taxed?
If you’re divorced and get financial help from your ex-spouse, you need to be careful about the type of support you receive because it will make a difference at tax time. Moreover, dealing with taxes as a single parent can be tricky to navigate when you file. Child support payments are not considered taxable income — nor are they deductible by the person making the payments. Alimony payments are also not taxable or deductible.
10. Who Claims the Children as Dependents If We Co-Parent?
Claiming dependents can be tricky if you’re divorced. Typically, you can treat a child as a qualifying dependent if that child lives with you more than half the year. You’re entitled to claim exemptions — which reduce your taxable income — for dependents. Plus, you qualify for other tax deductions and credits as the custodial parent.
If your ex-spouse earned more than you, they will be treated as the custodial parent and allowed to claim the child as a dependent, according to the IRS.
11. Can We Take the Earned-Income Tax Credit?
The earned-income tax credit can help lower the tax burden on low-income families, and families with one earner might fall into this category.
In order to qualify for the earned-income tax credit, your AGI cannot exceed a certain level.
The level is based on your filing status and the number of qualifying children you have.
12. Can I Get the Earned-Income Tax Credit If My Only Income Is Alimony?
To qualify for the earned-income tax credit, you must actually have earned income. So, if alimony or child support was your only income, you can’t qualify for the credit.
Social Security and unemployment benefits also don’t count as earned income.
You can also be disqualified for the credit if you receive investment income that exceeds a certain amount.
13. Does Everyone Need To Have Health Insurance?
The short answer is no. Under the Patient Protection and Affordable Care Act, everyone was required to have minimum essential health coverage or be subject to a penalty that is assessed when you file your taxes. But the penalty is no longer in effect as of 2019.
However, you may have to pay a penalty at the state level if you live in one of the following states:
14. What Filing Status Should I Use If I Am Widowed?
If you become a widow, you need to make sure you don’t file using the wrong tax status. Otherwise, you could miss out on some tax breaks.
If your spouse dies during the year and you’re a single-income household at tax time, you can still use the married filing jointly status for the year in which your spouse died. That way, you can take advantage of the higher standard deduction for married couples and joint tax rates.
15. Can I Deduct Student Loan Interest After the Divorce?
Some of the tax benefits you got as a single-income household while you were married might disappear when you get divorced. For example, you can deduct up to $2,500 in student loan interest as long as your modified AGI is $175,000 or under if you’re married filing jointly. Note that the deduction phases out beginning at a MAGI of $145,000.
If you are filing as single or head of household, however, the deduction starts to phase out at $70,000 to $85,000.
16. Are We Eligible For a Healthcare Subsidy?
Taxpayers whose income is at least 100% of the poverty level might qualify for the premium tax credit healthcare subsidy if they buy their health coverage through their state’s Affordable Care Act exchange.
If the subsidy that you receive is too high, you could have to repay some of the credit you received when you file your tax return. Or if you and your spouse separate and use a married filing separately status, you typically can’t qualify for the credit.
Filing income taxes can be particularly challenging for single-income families, but these single-income family tips for taxes can make filing easier and could help you avoid overpaying Uncle Sam.
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Cynthia Measom, Taylor Bell and Karen Doyle contributed to the reporting for this article.
This article originally appeared on GOBankingRates.com: 16 Tax Tips for Single-Income Families