Can I Claim My Children On My 2019 Taxes?

Claiming a child and the tax benefits that come with that is one of the few benefits of having a child (kidding, of course).

Jodie writes in, “I heard there’s a lot of changes with claiming dependents for 2018. Can I claim my children on my 2018 tax return? If yes, what benefits come with that? Thanks!”

Thanks for writing, Jodie. The rules for claiming dependents for tax purposes have changed drastically for this tax year. Claiming a dependent yields no exemption this tax year. Previously, for every dependent you claimed, you could claim an exemption from your income worth $4,050.

This year, if you claim your children, you will not be able to claim that exemption, however there are still some tax benefits that go with having a dependent child.

First, How Do I Know If I Can Claim My Child?

I won’t go into the details here, but if you would like to know the process of determining if you have a dependent child, click here to review the tests you would need to go through.

Second, If I Can Claim My Child(ren), What Benefits Are There?

While excluding the dependency exemption is no longer a benefit for claimants, there is still credits that can be claimed. First, there is the Earned Income Tax Credit (EITC). For the rules for determining if you can claim the EITC and whether your child qualifies as a qualifying child, click here.

Next, there is the Child Tax Credit. Previously, claiming the Child Tax Credit yielded a credit against your tax liability of $1,000. For tax year 2018, the Child Tax Credit is worth $2,000 per qualifying child and up to $1,400 of that is refundable.

Simply put, the Child Tax Credit was improved upon and made more favorable for the average taxpayer. This was meant to somewhat offset the disadvantage of no longer being able to claim dependents for the exemptions.

I hope this short guide was helpful and if you have any questions regarding taxes or finance, please email or leave it in a comment below. Thank you.

 


This article is not intended to be financial, tax, or legal advice. For specifics on claiming your children and what benefits you can receive, please talk to a local professional.

When Should I Use a Fixed Annuity?

Before talking about when it is appropriate to use a certain financial tool, we should discuss what it is and how it works. Anthony writes in, “When should I use a fixed annuity for retirement?”

Thanks for writing, Anthony. See, a fixed annuity is a tool that one might consider for retirement when they want guaranteed payments growing or paying out at a certain rate. The term ‘fixed’ here means the account grows at a fixed interest rate and is therefore not subject to investment risk or fluctuations with the market.

As you might have guessed, this type of account is primarily useful for a person who is especially conservative (risk-averse) and cannot bear to see their hard-earned money fluctuate in their account.

 

So When Should You Use a Fixed Annuity?

For some people, the answer to this question may be “never.” It really depends on your time horizon for the investments in a given account and your tolerance to bear risk.

While annuities are a particularly useful tool for retirement planning, your investment objectives and financial goals will determine what tools you use.

Something to consider, however, is that utilizing any kind of fixed account will have its benefits and its drawbacks. For instance, it is not uncommon for fixed accounts to grow at a guaranteed rate of 2-3% a year. Considering this is guaranteed, many people may like the idea of a risk-free account that grows at many times what a savings account at a bank may grow at.

However, it is important to consider the opportunity costs with a fixed annuity. First, there is the fact that the fixed annuity may struggle to even keep up with inflation.With inflation averaging greater than 3% a year, a fixed account may not be the greatest option for accumulating wealth for a younger person with a long time horizon and the ability to withstand short-term market losses.

The second important factor to consider is that a diversified variable annuity account may average 6-7% annually. This kind of allocation would allow a person to absorb the 3% inflation rate and realize a real 3-4% increase in their money annually. And if the person is retired, it allows them to draw the 3-4% of their account value annually without drawing down the value, theoretically allowing the account to last in perpetuity.

It is important to consider what your objectives are and to discuss your goals with a professional before making any kind of long-term decisions like retirement planning.

But what do you think? What kind of tools have you utilized for retirement and how has it fared for you?

 


The information in this article does not constitute legal, financial, or tax advice. For help determining what tools to use in retirement, please contact a local retirement professional.

What Category Do I Start With For My Budget?

Jason writes in: “My family and I are trying to figure out where to even begin with budgeting. What category do I start with?”

Thanks for writing, Jason. Where you start is going to depend on you and your family. Specifically, it is going to depend on where you are on your journey to becoming debt-free, as well as your family’s values.

A good place for anyone to start with the budget is the essentials: you have to eat, you have to keep the heat/air conditioning on, you have to keep the lights on, and you have to pay rent/mortgage. If you are really struggling to get by, that is where your budget will start every month until you have breathing room.

If you and your family are having trouble staying above water, then you will be living as frugally as possible: no going out to eat, working extra hours, or even taking a second job.

But if you are not struggling, then you may want to consider broadening your budgeting categories. You might start with charitable giving. If your family values helping others, then this would be a good place to start as it puts your values on the forefront and helps to change your mindset toward money.

If you struggle with saving, you may want to make the first and second categories Long-Term Savings (Retirement) and Short Term Savings (Emergency Fund, New Car Fund). This makes it easier to save so it isn’t something that is on the back-burner but instead is something that you do at the beginning of every month with little thought.

The most important thing to remember is that budgeting is a personal process and everyone will have different categories, values, and percentages set aside for every category. The important aspect of this is remembering to even start the budget. Knowing where your money is going is the first step to changing any potentially bad behaviors. It is also potentially revealing as to what your family values.

Thanks for reading. What category does your family start the budgeting process with?


This article does not constitute legal, financial, or tax advice. For specific information on budgeting and helping your family get out of debt, please consult a local professional.

Is it Worthwhile to Itemize Deductions After Tax Reform?

After the Tax Cuts and Jobs Act of 2017, it is estimated that most people that have itemized their deductions in the past will likely end up taking the standard deduction this year instead. There are multiple reasons for this, but the primary one is the nearly doubling of the standard deduction from $6,350 to $12,000 for single taxpayers this year.

Before the TCJA of 2017, there was a phase-out limitation for each of the filing statuses that was determined by their adjusted gross income. However, starting in 2018, that will no longer be the case and the limitation on itemized deductions for higher income taxpayers will no longer be a factor.

 

What If My Itemized Deductions Were Greater Than $12,000 Last Year and Likely Will Be Again This Year?

You may have to recheck that because many of the itemized deductions that were allowable in tax year 2017 have either been severely limited or repealed altogether.

All of the deductions that were subject to the 2% floor have been suspended, including tax preparation fees, investment fees, unreimbursed employee expenses, the home office deduction, and many more. This suspension is going to be in effect until December 31, 2017.

In addition to the deductions subject to the 2% floor, there has been a major modification to the medical expenses deduction. For tax years 2017 and 2018, you may deduct your qualified medical expenses in excess of 7.5% of your adjusted gross income. However, in tax year 2019, this amount increases to 10% of your adjusted gross income, helping to limit this deduction.

For a list of qualified medical expenses that are allowed to be deducted, click here.

Another factor in limiting itemized deductions is the change to the home mortgage interest deduction. The new law lowers the amount of interest on mortgage debt that can be deducted to $750,000. Under the old law, the amount was $1,000,000 in home mortgage debt that could be deducted.

And with the change in the home mortgage deduction comes the change to state and local taxes that are allowed to be deducted. This includes property taxes and other taxes or sales and use taxes. The new law caps the deduction of state and local taxes at $10,000, forcing high-taxing states and localities to rethink their policies to remain competitive.

 

So Should I Itemize?

After reviewing the most impactful changes to itemized deductions after tax reform, it is clear that Congress’ intentions was to simplify the process and reduce the amount of people that would be claiming itemized deductions over the standard deduction.

That being said, there are still people who will likely reach the cap of each of the itemized deductions allowable and find it advantageous over taking the standard deduction. Even with the limitations, the only way to tell may be just to fill out the forms and compare which is greater.

 


This article does not constitute legal, financial, or tax advice. For help reviewing your tax situation and to help determine if itemizing your deductions is advantageous to your situation after tax reform, consult a local CPA or EA.