The IRS is giving more time to California taxpayers to file—in the wake of last winter’s natural disasters, the normal due dates had previously been postponed to Oct. 16. – Forbes – Taxes
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Updated for tax year 2023.
As a parent, there’s a chance you may lend your kids money throughout life. Maybe it’s to buy a bicycle, to get their first car, or even to purchase their very own home. But, when you fork over cash to your family, does the Internal Revenue Service (IRS) care about those loans?
At a glance:
Small loans to your children are not a concern for the IRS.
Charge interest on significant loans to avoid gift tax implications.
If your child doesn’t pay back the loan, you can take a bad debt deduction.
For small loans under $10,000, the answer is simple — no. The IRS isn’t concerned with most personal loans to your son, daughter, stepchild, or other immediate family member. They also don’t care how often loans are handed out, whether interest is charged, or if you get paid back.
But, as with most things, there are exceptions.
If you loan a significant amount of money to your kids — over $10,000 — you should consider charging interest.
If you don’t, the IRS can say the interest you should have charged was a gift. In that case, the interest money goes toward your annual gift-giving limit of $17,000 per individual (as of tax year 2023). If you give more than $17,000 to one individual, even if the individual is your child, you are required to file a gift tax form.
The rate of interest on the loan must be based on the lesser of applicable federal rates (AFRs) set by the IRS or the borrower’s net investment income for the year. You don’t need to charge interest if the borrower’s investment income is $1,000 or less. If you choose to charge interest lower than the AFR, it’s called a below-market loan, and there are tax implications. See the last section in this article for more information about this topic and some exceptions.
Some people may think they can give large amounts of money to their children and call it a loan to avoid the hassle of filing a gift tax return, but the IRS is wise to that. The loan must be legal and enforceable. Otherwise, it may be deemed a gift.
When loaning money to a family member, it’s good practice to seek legal counsel and have a professional help you draw up an official loan agreement for both parties to sign.
You can give “student loans” to help fund your kid’s higher education by drawing up a contract like any other loan.
When they graduate and start making payments, your children can take the student loan interest deduction on any interest paid to you. Remember that you will have to pay taxes to the IRS on that interest income.
One of the advantages of a loan contract is that if your child doesn’t pay, you can take a deduction for a non-business bad debt. Additionally, you don’t have to pay gift tax to the IRS on the amount you would have if you had gifted the money.
To take a bad debt deduction, you must prove that the debt is truly worthless and there is no chance you will be paid back. Have your child make a written statement that they cannot pay, and gather as much evidence that you tried to collect the debt as possible. Letters, invoices, and phone calls can all be used as proof in this instance.
But what if you fail to document the loan properly and legally, and the IRS decides your loan is actually a gift?
In most cases, you won’t have to pay taxes for a “loan” the IRS deemed a gift. Even if you exceed the $17,000 annual gift exclusion we mentioned before, you only owe gift tax when your lifetime gifts to all individuals exceed the lifetime gift tax exclusion. For tax year 2023, that limit is $12.92 million (up from $12.06 million in 2022).
If you’re like most people, that means you’re probably safe, but you still need to keep track of and report any gifts that exceed the annual exclusion ($17,000 in 2023).
You don’t have to worry about family loans being subject to tax consequences if:
You lend a child $10,000 or less, and the child does not use the money for investments, such as stocks or bonds.
You lend a child $100,000 or less, and the child’s net investment income is not more than $1,000 for the year.
If you don’t fall within the above exceptions, it might be a good idea to read up on below-market loans in IRS Publication 550 to determine the tax implication.
The post Family Loans: Does the IRS Care If I Lend My Kids Money? appeared first on TaxAct Blog.
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Do you pay someone to care for your child or another dependent while you work or look for work? If so, you could qualify for the Child and Dependent Care Credit (CDCC), a tax break that can help you offset the cost of daycare, preschool, and more.
At a glance:
The CDCC helps cover childcare expenses while you work or look for work.
It’s worth 20-35% of eligible expenses, up to $3,000 for one dependent ($6,000 for two or more).
Eligible expenses can include daycare, preschool, and day camp costs.
The Child and Dependent Care Credit is a federal tax credit designed to help families with the cost of care for their dependents, whether that be children in daycare, a caretaker for a disabled parent, or another eligible dependent.
Currently, the credit is worth anywhere from 20-35% of qualified care expenses — up to $3,000 for one qualifying dependent and up to $6,000 for two or more qualifying dependents.
For example, if you claimed the maximum amount of $3,000 in expenses for one dependent in 2023 and qualified to deduct 35% of care expenses, your credit amount would be $1,050 (or 35% of $3,000). The max credit for two or more dependents would be $2,100.
To claim the CDCC, you must have earned income during the tax year and must have paid for the care expenses so you could either work or look for work.
In other words, costs paid to a babysitter to watch your child while you go out for the evening aren’t an eligible expense. But if you pay daycare fees for someone to watch your toddler while you’re at work, that would be a qualified expense.
The amount you can claim depends on your adjusted gross income (AGI). You can claim the maximum credit percentage of 35% if your AGI is less than $15,000. If your AGI is $43,000 or above, you can claim 20%. The IRS lists the complete child and dependent care income limits on page 13 in Publication 503.
In most cases, the care expenses should be for someone you’re claiming as a dependent on your income tax return. Qualifying individuals must also fit into one of the following categories:
A child under 13 who lived with you for more than half the year
A disabled spouse who has lived with you for half the year and is mentally or physically unable to care for themselves
Another person (like a parent) who has lived with you for half the year and is mentally or physically unable to care for themselves. This person must be your dependent OR would have been your dependent except for one of the following reasons:
They earned more than $4,700 of gross income during the year.
They filed a joint return.
You or your spouse could be claimed as a dependent on someone else’s tax return.
The IRS covers some nuances for children of divorced parents in more detail in Publication 503 as well.
To claim the Child and Dependent Care tax credit, you’ll need IRS Form 2441 and Schedule C.
On Form 2441, you’ll list the names and info of any care providers (including address and Social Security number for tax purposes), the qualifying person(s) receiving care, and the care expenses you paid during the tax year. The form has a worksheet to help you determine your credit amount based on your provided information. Once you get that number, you’ll list your credit amount on Schedule 3, line 2.
If you use TaxAct® as your tax preparation service, we can assist you in making these calculations and filling out all the necessary tax forms on your behalf.
For more details, you can also check out the Form 2441 instructions provided by the IRS.
Some common qualifying care expenses for this tax credit include:
Costs of childcare provided by daycare centers or babysitters
Fees for preschool (and comparable programs) for children not yet in kindergarten
Day camp costs (overnight camps don’t qualify)
Payments made to a cook or house cleaner who also provided care for your dependent
Before- and after-school care for children under 13 years old
The following costs do NOT count as qualified care expenses for the CDCC:
Costs for children to attend kindergarten and above
Summer school programs
Tutoring fees
Overnight camp costs
Child support payments
The Child and Dependent Care Credit is nonrefundable. This means if the tax credit amount exceeds your tax liability, you won’t be able to claim the excess back as a tax refund.
Yes, you can claim the Child Tax Credit (CTC) and Child and Dependent Care Credit on the same tax return. Though they share similar names, these are two separate tax credits with different rules and eligibility requirements for tax filers.
The post Form 2441 FAQs: The Child and Dependent Care Credit appeared first on TaxAct Blog.
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