Children can bring tremendous happiness to a parent’s life. However, raising and educating those little bundles of joy can burn a noticeable hole in your wallet.
Fortunately, parents may be able to take advantage of a number of tax deductions and credits designed to reduce the costs associated with parenting. The IRS recently laid out ten tax benefits that you may qualify for as a parent.
Benefits You May Qualify For
1. Is your child a dependent? Listing your children as a dependent can mean saving a lot of money. For a child to qualify as a dependent, he or she must meet four criteria:
- He or she must be your child, step child, adopted child, foster child, brother or sister, or a descendant of one of these (a niece or grandchild for instance).
- The child must live with you for more than half the year.
- The child must be under 19 years of age at the end of year. If the child is a full-time student, he or she can be up to 24 years of age. If your dependent is totally and permanently disabled, there are no age restrictions.
- The child cannot provide more than half of his or her own financial support.
2. Are you a low to moderate income earner? The Earned Income Tax Credit (EITC) can provide a substantial credit on earned income. It’s also available to people who aren’t parents, but the credit is greater for eligible low-wage taxpayers with children. The maximum EITC that can be claimed for 2012 is $5,891, and the maximum income limit is $50,270.
3. Did you pay health insurance premiums for your child while self-employed? Even if your child is not a “dependent,” you may be able to deduct any premiums you paid for health care coverage after March 29, 2010. There’s one catch. Your child has to be under age 27 at the end of 2010.
4. Was your child under 17 years of age? You may be able to get a $1,000 Child Tax Credit on your tax return. This credit is limited to taxpayers who fall within a certain modified adjusted gross income. The credit begins to phase out if your income exceeds $110,000 as a joint filer, $75,000 as a single filer, or $55,000 as a married taxpayer filing a separate return. If the amount of your Child Tax Credit exceeds the amount of tax you owe, you may be able to get an additional refund through the Additional Child Tax Credit.
5. Did you pay someone to care for your child? If your child is less than 13 years old, you may be able to claim a tax credit. The care must have been provided in order for you to work or look for work. The amount of the credit depends on your income and can be as much 35% of your qualifying expenses.
6. Is your child a student at a college or university? The American Opportunity Credit is a tax credit for undergraduate college education expenses. It provides up to $2,500 in credits on money spent on tuition, fees, and related expenses. Likewise, the Lifetime Learning Credit allows you to earn a credit of up to $2,000 for higher education expenses. The amount of credit changes depending on income, but there is no limit on the number of years you can receive the Lifetime Learning Credit.
7. Did you adopt your child? You may be able to receive a credit of $12,150 per child for adopt-related expenses. To claim the Adoption Credit, you must file a paper tax return because you have to include adoption-related documentation.
8. Do you pay interest on a student loan? You may be able to claim up to $2,500 as a tax deduction on student loans. Your modified adjusted gross income must be less than $70,000 for a single taxpayer and $145,000 for a joint filer.
Does Your Child Need to File Taxes?
Did your child earn income this year? If your child has more than $5,700 in earned income, he or she likely has to file a tax return, even if listed as a dependent.
Did your child make investment income this year? If your child earned income from investments, interest, and dividends totaling more than $1,900, it may be taxed at the parent’s tax rate.
Some of you may wonder why the government provides tax benefits for having children. The argument goes that we all have a vested interest in the outcome of the country’s children.
Barring a miracle, one day you will be old. When that day comes, today’s children will care for you and pay taxes that fund your benefits. Since raising a child can be tremendously expensive, tax policy can incentivize people to have children and raise them responsibly. Presumably, this will lead to a population of well-educated, responsible, tax-paying citizens.
Published or updated March 20, 2013.