MARGARITAS AND TAXES
By: Kate Hennessy, CFP®
They have absolutely nothing in common, however given the time of year and the weather changing they both seem to be on people’s minds. I’ve learned lessons and tips from tax professionals throughout the years about ways to reduce our taxes, three of which I think you may find helpful as you think ahead to this year’s tax filing deadline of May 17.
- Child and Dependent Care Credit – applies to children under the age of 13 and allows the taxpayer to reduce their taxes. A taxpayer may use $3,000 of expenses per qualifying child, or $6,000 (for two or more qualifying children) if your child was under the care of an adult while the taxpayer (and spouse, if filing jointly) worked or actively looked for work. Costs for childcare, after school activities and organized sports have allowed us to receive a tax credit. For 2020 we had a total of $6,000 in expenses that qualified. The credit is not $1 for $1, but there is a sliding scale applied and it’s based on your income. The range of the sliding scale is .35 to .20. Here is an example of how we calculated our credit: $6,000 (expenses) x .20 = $1,200 credit applied to our taxes. Keep in mind that you’ll have to do some light recordkeeping to get this credit. You’ll have to total the amount of expenses you paid to the organization in the given tax year and provide the organization’s name and EIN on your tax return. You can spread this across multiple organizations. In our house one child is a swimmer and soccer player and the other child plays soccer and the clarinet. My philosophy in reducing our taxes is, every bit helps. For more information about this credit, visit the IRS website at https://www.irs.gov/taxtopics/tc602
- Charitable Gift Fund – this has been a lifesaver for us because the recordkeeping is easy. Most brokerage houses provide individuals with the capability to set up a Gift Fund, sometimes known as a Donor Advised Fund. The taxpayer receives a deduction in the year they make a contribution to the Gift Fund. They can invest the Gift Fund in a mutual fund or other investment, i.e. 60/40 Balanced Fund and then make grants through their lifetime. It’s a win-win for all – the taxpayer gets a deduction when they make the contribution, they invest their contribution which allows them to grant more in the future, and their charity(s) of choice benefit from their deduction and growth.
- Simplified Method for Home Office Deduction – this applies to individuals that are self-employed and working from home. The simplified method is an easy way to determine the amount of expenses you can deduct for a home office. For more information about how to determine if you and your home office qualify for the deduction, see the IRS website at https://www.irs.gov/businesses/small-businesses-self-employed/faqs-simplified-method-for-home-office-deduction. If your home office is spacious and you elect the simplified method, you are limited to 300 square feet. The rate is $5.00/square foot.
As May 17 quickly approaches, think about your current situation and hopefully the dependent care credit or home office deduction may apply to you. As always, please reach out with any questions you may have.