If you’re a parent, or soon will be, you’re no doubt aware of how expensive it is to pay for food, clothes, activities, and education. Fortunately, the federal child tax credit is available to help many taxpayers with children under the age of 17, and there’s a dependent credit for those who are eligible with older children.

Before the Tax Cuts and Jobs Act (TCJA) kicked in for the 2018 tax year, the child tax credit was $1,000 per qualifying child. But it was reduced for eligible married couples filing jointly by $50 for every $1,000 (or part of $1,000) by which their adjusted gross income (AGI) exceeded $110,000 ($75,000 for unmarried taxpayers). To the extent the $1,000-per-child credit exceeded a taxpayer’s tax liability, it resulted in a refund of up to 15% of earned income (wages or net self-employment income) above $3,000. For taxpayers with three or more qualifying children, the excess of the taxpayer’s Social Security taxes for the year over the taxpayer’s earned income credit for the year was refundable. In all cases, the refund was limited to $1,000 per qualifying child.

Starting with the 2018 tax year, and applying through the 2025 tax year, the TCJA doubled the child tax credit to $2,000 per qualifying child under 17. If you’re eligible, it also allows a $500 credit (per dependent) for any of your dependents who aren’t qualifying children under 17. There’s no age limit for the $500 credit, but tax tests for dependency must be met. Under the TCJA, the refundable portion of the credit is increased to a maximum of $1,400 per qualifying child. In addition, the earned income threshold is decreased to $2,500 (from $3,000 under prior law), which has the potential to result in a larger refund. The $500 credit for dependents other than qualifying children is nonrefundable.

The TCJA also substantially increased the “phaseout” thresholds to qualify for the credit. Starting with the 2018 tax year, the total credit amount allowed to a married couple filing jointly is reduced by $50 for every $1,000 (or part of a $1,000) by which their AGI exceeds $400,000 (up from the prior threshold of $110,000). The threshold is $200,000 for other taxpayers. So, if you were previously prohibited from taking the credit because your AGI was too high, you may now be eligible to claim the credit.

The changes made by the TCJA generally increase the value of these credits and widen their availability to more taxpayers. Please contact us for further information or ask about it when we prepare your tax return.

Many people have found themselves working from home during the COVID-19 pandemic. If you’re one of them, you might wonder, “Can I claim the home office deduction on my 2020 tax return?”

The short answer is: Only if you’re self-employed. Employees can no longer claim home office expenses, and even self-employed taxpayers must follow strict rules to claim a deduction.

If you qualify, you can deduct the “direct expenses” of the home office. This includes the costs of painting or repairing the home office and depreciation deductions for furniture and fixtures used there. You can also deduct the “indirect” expenses of maintaining the office. This includes the allocable share of utility costs, depreciation, and insurance for your home, as well as the allocable share of mortgage interest, real estate taxes, and casualty losses.

In addition, if your home office is your “principal place of business,” the eligible costs of traveling between your home office and other work locations are deductible transportation expenses, rather than nondeductible commuting costs.

You can deduct your expenses if you meet any of these three tests:

1. Principal place of business. You’re entitled to deductions if you use your home office, exclusively and regularly, as your principal place of business. Your home office is your principal place of business if it satisfies one of two tests. You satisfy the “management or administrative activities test” if you use your home office for administrative or management activities of your business, and you meet certain other requirements. You meet the “relative importance test” if your home office is the most important place where you conduct business, compared with all the other locations where you conduct that business.

2. Meeting place. You’re entitled to home office deductions if you use your home office, exclusively and regularly, to meet or deal with patients, clients, or customers. The patients, clients, or customers must physically come to the office.

3. Separate structure. You’re entitled to home office deductions for a home office, used exclusively and regularly for business, that’s located in a separate unattached structure on the same property as your home. For example, this could be in an unattached garage, artist’s studio, or workshop.

You may also be able to deduct the expenses of certain storage space for storing inventory or product samples. If you’re in the business of selling products at retail or wholesale, and if your home is your sole fixed business location, you can deduct home expenses allocable to space that you use to store inventory or product samples.

The amount of home office deductions for self-employed taxpayers is subject to various limitations. Proper planning is key to claiming the maximum deduction for your home office expenses. Contact us if you’d like to discuss your situation.