Fortunately, parents can take advantage of a number of tax deductions and credits designed to reduce the costs of parenting.
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8 Benefits You May Qualify For
The IRS has established eight notable tax benefits that you may qualify for as a parent. Take a look at the tax benefits mentioned below and the stipulations for each. They might put quite a bit of money back in your pocket each year.
1. Is your child a dependent?
Listing your child(ren) as a dependent on your tax return can save a lot of money. In order for a child to qualify as a dependent for tax purposes, he or she must meet four criteria:
- He or she must be your child, stepchild, 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 the 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 tax credit on your 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 2017 is $6,318, and the maximum income limit is $53,930.
Be sure to check the EITC law updates to ensure that you meet the specific guidelines and income limits for your unique situation.
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 throughout the year if you had self-employment income. This includes the entire cost of any medical, dental, and long-term care insurance premiums for you, your spouse, and your dependents. In order to qualify, your child has to be under age 27 at the end of 2017.
There is also a catch. In order to deduct these premiums, neither you nor your spouse could have been eligible to participate in an employer’s existing, subsidized health care group plan. This is an important thing to remember if your self-employment income is a side hustle. It’s also important if your spouse is/becomes employed and is newly eligible to join a group plan.
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 if your child is still under 17 at the end of the year. This credit is available for each qualifying child, too. And remember that a tax credit is different from a tax deduction. The Child Tax Credit is a dollar-for-dollar reduction in your total bill, which could mean substantial savings if you qualify.
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. For every $1,000 that your income exceeds these limits, the $1,000 credit will be reduced by $50.
Also, to qualify for this credit, your child has to have lived with you for more than half of the tax year, be a U.S. citizen, and not have provided for more than half of their own living expenses.
If the amount of your Child Tax Credit exceeds the amount of tax you owe, you won’t get the difference back in the form of your tax refund. However, you may be able to get an additional refund through filing the Additional Child Tax Credit.
5. Did you pay someone to care for your child?
If your child is younger than 13 years old, you may be able to claim a tax credit for expenses related to their childcare throughout the year. The care, however, must have been provided in order for you to work or look for work.
The amount of the credit depends on your income, but it 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. If you owe less in taxes than the credit for which you qualify (bringing your taxes owed to zero), you can have a portion (40%) of the remaining credit refunded to you, up to $1,000.
Likewise, the Lifetime Learning Credit allows you to earn a credit of up to $2,000 for higher education expenses. This credit is calculated as 20% of the first $10,000 of (qualified) education expenses, up to the $2,000 maximum.
The amount of credit changes depending on your income, but there is no limit to the number of years you can receive the Lifetime Learning Credit. Unlike the AOC, above, the LLC is not refundable. This means that if the credit earned reduces your tax owed to zero, you won’t be able to receive any of the credit back in the form of a tax refund.
7. Did you adopt your child?
You may be able to receive a credit of up to $13,460 per child for adoption-related expenses in the year in which the adoption was finalized. If this credit reduces your tax liability to zero, the excess credit can be carried forward for up to five years (so the money is not simply lost, nor is it refunded in the form of a tax return).
This credit includes the adoption of a child under the age of 18 or one who is unable to care for him or herself in a physical or mental capacity. It does not include expenses incurred in order to adopt the child of your spouse.
The amount of the credit is phased out according to your MAGI. Also, in order 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 for the interest paid on student loans this year. In order for your loan to apply, it must have been taken out solely to pay for qualifying educational expenses and the loan can’t be from a related person or under an employer plan. Also, the student must be enrolled at least half-time in an eligible educational program and working toward a degree, certificate, or other recognized credential.
In order to take this deduction or some part of it, your modified adjusted gross income must be less than $80,000 for a single taxpayer and $160,000 for a joint filer. Starting at $65,000 (single) and $130,000 (joint), however, the credit amount begins to phase out.
Does Your Child Need to File Taxes?
If you have a small child at home and are like most Americans, you probably haven’t given thought to whether your child needs to file their own tax return. However, depending on their financial situation, it may be in order.
Did your child earn income this year?
If your child has more than $6,300 in earned income ($7,850, if they are blind), he or she likely has to file a tax return. This is true even if he or she is listed as a dependent on your own return.
This “earned income” only applies to wages and salaries that your child has received throughout the year as payment for providing services to an employer. This is true even if the pay is for a part-time job.
So, if little Johnny has been killing it on that weekend paper route and managed to rake in $7,000 this year, he will need to file a return.
Did your child make investment income this year?
If your child earned income from investments, interest, and dividends totaling more than $1,050 ($2,600, if blind) this year, he or she will need to file a return for their unearned income.
There is the option to elect to report a child’s unearned income on the parent’s return. This is allowed if the child is under 19, or under 24 if they are a full-time student. If the parent does this, the child will not have to file their own return. However, note that the reported interest and dividend income may be taxed at the parent’s tax rate in this situation, rather than the child’s.
Some of you may wonder why the government provides tax benefits for having children. Well, the argument goes that we all have a vested interest in the outcome of the country’s children.
God-willing, you will one day grow 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. And those citizens will keep our country running (and funded) for years to come.
As always, consult with a tax professional before making any decisions. If you do your taxes on your own, our list of the best tax software programs can all handle these deductions.