Ah, tax time. The most dreaded time of the year gets even more complex when you have a child. The good news is that your little one could mean you get a bigger refund or owe less when Uncle Sam comes knocking.
In this story:
- The most common tax perks for new parents
- How valuable those tax perks are
- Which tax benefits will come around when your child is all grown up and heading off to college
When we talk about the perks of parenting, they’re rarely financial. Kids are expensive! Any financial benefits that accompany a new child may not be immediately clear, particularly as you’re confronted with the cost of raising a child and budgeting for a college fund. However, there are tax laws designed specifically to help families. These laws are worth learning about, as they have the potential to save and even earn you some extra cash come tax time.
The majority of tax benefits for parents come in the form of credits. A tax credit reduces your tax liability directly. For instance, if you owe $4,000 to the federal government for income taxes, a credit of $3,500 would reduce that liability to $500.
The three tax credits most new parents should concern themselves with are the Child Tax Credit, the Child and Dependent Care Credit, and the Earned Income Tax Credit. Read more about them and their potential tax reduction for your first child below.
Child tax credit
Potential tax reduction: $1,000
Most people who qualify for the federal child tax credit will receive $1,000 for each child in their household under 17 at the end of the year. But there are income limits to claiming this credit and a series of requirements for qualifying. For the 2016 tax year, for instance, taxpayers got that full amount only if their adjusted gross income was less than:
- $55,000 for married couples filing separately
- $75,000 for single, head of household or qualifying widow/widower filers
- $110,000 for married couples filing jointly
For every $1,000 you’re over these limits, the credit is reduced by $50.
To qualify for this credit, the child in question must be your son, daughter, stepchild, foster child, brother, sister, step-sibling, half-sibling or a descendant of those family members who:
- Was under age 17 at the end of the tax year
- Did not provide more than half of his or her own support for that year
- Lived with you for more than half of the year
- Is claimed as a dependent on your return
- Did not file a joint return for the year
- Is a U.S. citizen, national or resident alien
The IRS updates income limits and credit amounts from time to time. You can find the most up-to-date information on Publication 972 here.
Child and dependent care credit
Potential reduction: Up to $3,000
If you’re like many new parents, you’ll be relying — at least in part — on the assistance of others for child care while you are working. The federal Child and Dependent Care Credit is intended to assist in these child care expenses. It is based on a percentage of the total expenses you paid to a child care provider throughout the tax year. That percentage is based on your income.
The exact amount you’re able to claim on this credit varies depending on your total expenses and your income.
You’ll claim a certain percentage of your allowable expenses. These expenses include things such as weekly child care expenses, meal expenses and preschool tuition. The percentage allowed ranges from 20% to 35%. Taxpayers with the lowest incomes are allowed a greater credit, though there is no upper income limit on who can claim it.
For tax year 2016, the most a taxpayer could claim was $3,000 for one dependent or $6,000 for more than one.
As with all tax credits, there are limitations and qualification standards. This one can be taken for your child, as long as he or she is under the age of 13 at the end of the tax year, or for any other dependents who are unable to care for themselves and have lived in your home for at least half of the year. In addition:
- You cannot claim the credit if the person providing care is your spouse, the parent of the child, another dependent listed on your tax return or another child of yours who is under the age of 19
- The claimed child care expenses must come because you are working or looking for work, unless you are a full-time student or unable to care for yourself
- If you are married, you must file jointly
- The name, address and taxpayer identification number of the child care provider must be included on the tax forms
The IRS can update maximum credit amounts annually. You can find the most up-to-date information on Topic 602 here.
Pro tip: Many states also offer their own child tax credits and child and dependent care credits. This doesn’t affect your ability to take the federal child tax credit, and may actually expand eligibility requirements. The Assets & Opportunity Scorecard from the nonprofit Corporation for Enterprise Development provides insight into which states have their own credits.
Earned income tax credit
Potential reduction: Up to $3,373
The Earned Income Tax Credit is designed to help working-class, lower-income families. Unlike most other credits, the EITC is refundable.
The EITC is wholly based on your adjusted gross income and household size. Both the qualification standards and the maximum amount you are allowed to receive change annually.
For 2016, a qualifying family with one child could receive up to $3,373 for the EITC. With each child, the amount increases. For example, a family with two qualifying children could receive up to $5,572 for 2016, and a family with three children could get up to $6,269.
Because this credit specifically targets lower-income taxpayers, the income limits are relatively restrictive. For instance, in 2016, a single parent (filing as head of household, or a widow/widower) with one child had to make less than $39,296 to qualify. A married couple with one child had to make less than $44,846.
Forms needed: Schedule EIC
The IRS updates income limits and EITC amounts yearly. You can find the most recent information on the IRS website here.
Potential reduction: Up to $13,460
The federal Adoption Credit is designed to help parents offset some of the expenses associated with adopting a child. These costs include:
- Adoption fees
- Court costs and attorney fees
- Travel expenses, including food and lodging during the adoption process
There are income exclusions and dollar limitations for claiming the adoption credit. Further, if your employer offers adoption assistance, the amount it kicks in reduces your tax burden (by subtracting it from your gross income), but is not subject to reimbursement under the tax credit.
For tax year 2016, the adoption tax credit was limited to a maximum of $13,460 per child, and those making more than $201,920 were subject to a phaseout, receiving less than 100% of eligible reimbursable expenses.
The IRS updates dollar limits and income requirements annually. You can find the most up-to-date information on the Adoption Credit in Topic 607 here.
For college-age students
The tax benefits of having children don’t stop when they’re no longer small. You may be eligible to claim several credits when they reach college age.
The American Opportunity Tax Credit, Lifetime Learning Credit and tuition and fees deduction are all available for parents who pay expenses on an eligible student.
For the most up-to-date information on education-related tax benefits, visit the IRS website here.
Save receipts for medical deductions
As a parent, you will incur medical expenses. And if your child has special medical or ongoing health care needs, you may want to itemize on your tax return. This isn’t appropriate for everyone, as only health care expenses that exceed 10% of your adjusted gross income are deductible (7.5% if you or your spouse is 65 or older).
For example, if your adjusted gross income is $100,000 for the year, your household medical expenses have to exceed $10,000 before any of them are eligible for deduction. But once you meet that threshold, there’s a long list of health care expenses that qualify. They include home improvements related to a disability, special therapies and instructions, private schools and programs if they are medically necessary, the cost of food for special diets, and the additional expected doctor visit and prescription drug costs.
If you’re unsure whether you’ll hit that 10% threshold, hold on to your receipts and bills just in case.
Forms needed: Schedule A
Keep these credits in mind come tax time
Tax laws are in a constant state of flux, but these credits have been around for a while and will likely continue to benefit parents for many years to come. Your accountant or your tax software will generally home in on these and other tax credits that can benefit your bottom line at the end of the year, and the IRS website can provide updated credit amounts and changes as they happen.
Though the value of these credits varies widely depending on your personal financial circumstances, every bit can help when you’re raising a child. Being aware of where you stand to save can ensure that these opportunities don’t slip by.