As an accountant, I talk to a lot of people about their finances and the difficulty of covering their expenses, and I am often asked about what is the best way to obtain a car: new, used, or leased?

Cars are, without question, the most expensive consumer item – not counting houses and tuition, that is. Clearly, the smoothest way to buy a car is to buy one brand new. There is no worry about who owned it before or if it has problems that were covered up. It will certainly drive nicely (and have that new car smell). The only downside is that it is the most expensive option. Therefore, if one is trying to save money, he or she will buy a used car. You see, many people keep cars for three to ten years and then sell them, often back to the dealer in the form of a trade-in. The dealer then resells that car – hence, the enormous business of selling used cars. Here is how it works: The original owner trades in a car to a new car dealer. That means the car owner is selling the car to the dealer for, say, $5,000. The dealer then resells the car to a used car buyer for $10,000. In this example, $5,000 is the wholesale price, and $10,000 is the retail price.

Another year is coming to a close and, that means thinking income taxes. As always, we need to see what can be done before the close of the year. Let’s go through a checklist:

Child Tax Credit: Children up to age 17 (it was 16 in the past) receive a $3,000 tax credit. (Under age six get $3,600.) This credit is fully refundable. If a family earns $40,000 and has five children, they will get back about $20,000 from the feds and Maryland, which includes the child tax credit and the earned income credit. This money is tax free. They will also get free health insurance with zero deductibles. Of course, there are also food stamps, worth maybe $1,000 per month. Doesn’t seem like a big incentive to work hard and make more money. This child tax credit is reduced for any money you have been receiving since July as that money was an advance of this credit.

A new tax law takes effect for 2021 that provides big handouts for families with children. The child tax credit is going to $3,000 ($3,600 for those five and under), and half of it will be coming in monthly checks! That is automatic. There is also a significant increase in the child care tax credit. That is what I will be discussing.

The Old Child Care Tax Credit

According to the prior law, you got a 20% credit for the cost of care in preschool and day camp for under age 13. The maximum costs considered were $3,000 for one child and $6,000 for two or more. You could therefore save a maximum of $1,200. ($6,000 x 20% = $1,200). This credit was non-refundable. That means that if your tax liability was $500 and your tax credit was $1,000, your taxes went down to zero but you did not get any money back. Therefore, you only saved a total of $500. The concept is that daycare is a “work expense” to allow woman to go to work.

It seems like the last tax year never ended; it just flowed into this year. Of course, with COVID, last year has been pretty crazy. In fact, in addition to our health, schools, simchas, and shuls, the virus has affected our taxes.

COVID Tax Issues

First, two minor points: 1) You did not have to take money (RMDs) out of your IRAs and retirement accounts in 2020. 2) You also get to claim charity of $300 if you do not itemize. Nothing overwhelming there.

In a few months, we will be filing 2020 taxes. Boy, what a year this has been! Let’s run through the important things you should be looking into.

First, assuming that Biden has actually won, we can fairly assume he will raise taxes, meaning it is better to earn money in 2020 than it will be in 2021. But charity deductions might not be more valuable in 2021. One thing I read said that under Biden charity might be capped at a 28% deduction, making charity more valuable in 2020! You can read lots of possible scenarios of a new tax law on the internet.

As tax season approaches, let’s review several tax savings opportunities related to children.

The Child Tax Credit

For every child under the age of 17, you get a $2,000 tax credit. For children 17 and over, you get only $500. A tax credit is very straightforward. It means a full $2,000 (or $500) off your taxes. Your income has to be under $400,000 to qualify. This generous income cap is a big boon to frum families.

If a family (such as a kollel couple with no income) owes no taxes, they still get the 40% of the credit, or $1,000 ($2,500 x 40%).