Individual Tax

Filing taxes can be a daunting task for anyone, but for single parents, it often comes with added complexities. As a single parent, you may be eligible for various tax benefits and credits designed to alleviate some of the financial burdens of raising children on your own. To ensure you’re maximizing your tax return while staying in compliance with tax laws, it’s crucial to understand the process thoroughly. In this comprehensive guide, we’ll walk you through the steps of filing taxes as a single parent.

1. Determine Your Filing Status
The first step in filing your taxes as a single parent is to determine your filing status. Most single parents will file as “Head of Household,” which offers more favorable tax rates and a higher standard deduction compared to “Single” status. To qualify as Head of Household, you must meet the following criteria:

• You must be unmarried or considered unmarried on the last day of the tax year.
• You must have paid more than half the cost of keeping up a home for the year.
• A qualifying child must have lived with you for more than half the year.

2. Gather Your Income Documents
Collect all your income documents, including W-2s, 1099s, and any other relevant financial statements. These documents provide essential information about your earnings and will help you accurately report your income on your tax return.

3. Claim Dependents
As a single parent, you can claim your child or children as dependents, which can significantly impact your tax liability. To claim a child as a dependent, they must meet certain criteria, including:

• Relationship: The child must be your biological child, adopted child, stepchild, foster child, or a sibling, half-sibling, or descendant of one of these.
• Residency: The child must have lived with you for more than half the year.
• Age: The child must be under 19 years old (24 if a full-time student) or have a permanent disability.

Claiming dependents can make you eligible for tax credits like the Child Tax Credit or the Earned Income Tax Credit (EITC), which can reduce your tax liability or result in a refund.

4. Gather Deduction Information
Single parents can potentially benefit from various tax deductions, including:

• Childcare Expenses: If you paid for childcare to work or look for work, you may be eligible for the Child and Dependent Care Credit.
• Education Expenses: You may qualify for education-related deductions or credits if you pursued higher education.
• Medical Expenses: Keep records of medical expenses for potential deductions if they exceed a certain percentage of your income.

5. Explore Tax Credits
In addition to the Child Tax Credit and EITC mentioned earlier, single parents should consider other tax credits such as:

• Child and Dependent Care Credit: This credit helps cover a portion of childcare expenses.
• American Opportunity Tax Credit (AOTC) or Lifetime Learning Credit: These credits are available for qualified education expenses for yourself or your dependent children.
• Adoption Tax Credit: If you’ve adopted a child, you may be eligible for a tax credit to help cover related expenses.

6. File Your Tax Return
Now that you have gathered all necessary documents and information, it’s time to file your tax return. You can choose to file your taxes electronically using tax preparation software, hire a tax professional, or file a paper return. Filing electronically is often faster and more convenient.

7. Consider Tax Planning
Throughout the year, it’s a good practice to engage in tax planning. This involves keeping track of expenses, maximizing contributions to tax-advantaged accounts (such as a 401(k) or an Individual Retirement Account), and staying informed about any changes in tax laws that may affect you.

Filing taxes as a single parent can be challenging, but with careful planning and attention to detail, you can ensure you’re taking advantage of all available tax benefits and credits. Remember to keep accurate records, claim eligible dependents, explore tax deductions and credits, and consider seeking professional help if you’re unsure about any aspect of your tax return. By following these steps, you can optimize your financial situation and provide the best possible future for yourself and your children.

Regular financial checkups give you an opportunity to identify where you can improve your overall tax situation. They also help identify areas of concern that may require more detailed attention. In a similar fashion, regularly reviewing your tax situation with a financial professional can identify opportunities to improve your tax picture and can often shed light on areas where you may be paying too much in taxes. Simple strategies that range from adjusting your withholding to timing the sales of securities can be employed to potentially reduce your tax bill.

Adjust Your Withholding

This is a simple and basic move. If you had too little tax withheld last year, you ended up paying the IRS what you owed when you filed your return and may incur a penalty. If you had too much tax withheld, you received a tax refund. You may regard a large tax refund as a plus — but the reality is that a large tax refund is simply an interest-free loan of your money to the government. It may make more sense to have less tax withheld up front and receive more in your paycheck. That way, you can save or invest the money and potentially earn interest, dividends, or perhaps enjoy a capital gain on your investments.

Time the Sale of Securities

How long you own a profitable asset before you sell it can impact how much income tax you pay on your gain. Holding on to an appreciated asset for more than one year before you sell it results in long-term capital gain. The tax rate on long-term capital gains is 0%, 15%, or 20% depending on your taxable income and filing status. For example, if you are married and filing jointly in 2021, the long-term capital gains rate is 0% with income of up to $80,800, 15% with income between $80,801 and $501,600, and 20% with income over $501,600. In contrast, short-term capital gains are taxed at higher ordinary income tax rates.

If you have capital losses, look into selling investments in your taxable accounts to generate capital gains that can be offset by the losses. You could also potentially reduce taxes by investing in municipal bonds. Interest on municipal bonds is generally exempt from federal income taxes and might be exempt from state and local income taxes as well. Of course, credit ratings should be analyzed before purchase.

Add to Your Retirement Plan

You could potentially lower your income tax liability by increasing the amount you contribute to your tax-favored retirement plan (limits apply). If you’re age 50 or older, and your plan permits, you may be able to add to your retirement account by making catch-up contributions in addition to your regular plan contributions.

Consider a Health Savings Account

A health savings account (HSA) can also be a good tax saving option. You can contribute pretax income to an employer-sponsored HSA or make deductible contributions to an HSA you open on your own provided you are covered by a qualified high-deductible health plan. You can invest in an HSA and have it grow in a tax-deferred manner similar to an individual retirement account. And HSA withdrawals for qualified medical expenses are tax free. You can also carry over a balance from year to year, allowing the account to grow.