Having kids and raising a family can be expensive. Thankfully, there are a number of tax credits and deductions available that can help parents and families save money each year on their tax bill. Understanding these key tax breaks is crucial to maximizing savings.
Child and Dependent Tax Credits
Some of the biggest tax breaks come in the form of refundable and non-refundable tax credits based on having dependent children or other qualifying dependents.
Child Tax Credit
The Child Tax Credit provides families with a credit of up to $2,000 per dependent child under age 17. Up to $1,400 of the credit is refundable for each child. Income limits do apply.
Earned Income Tax Credit
Low-to-moderate income families may be eligible for the Earned Income Tax Credit (EITC). The EITC is a refundable tax credit meaning you can get a refund even if you don’t owe taxes. The credit amount depends on income and number of qualifying children.
Child and Dependent Care Tax Credit
The Child and Dependent Care Tax Credit offers up to $3,000 in nonrefundable credits for care costs for dependents under 13 or disabled dependents while working or looking for work.
Credit for Other Dependents
Taxpayers can claim a non-refundable credit up to $500 per dependent who does not qualify for other child/dependent credits like older kids or elderly dependents.
Childcare Cost Deductions
Several deductions allow parents to reduce taxable income based on childcare costs:
Child and Dependent Care Flexible Spending Account
A dependent care FSA lets you contribute and then distribute pre-tax dollars from your paycheck to pay for childcare while you work. Parents can contribute up to $5,000 per year.
Medical Child Support Deduction
Non-custodial parents can deduct medical child support payments meant to cover medical costs like health insurance premiums for kids.
Employer-Sponsored Dependent Care
Some companies offer reimbursement benefits for dependent care, freeing up more take-home pay by reducing taxed income. Check with your HR department to see if such plans are available.
Credits and Deductions for Education Expenses
Several options exist for getting some financial relief related to educational costs for kids:
American Opportunity Tax Credit
Families can claim a partially refundable annual credit up to $2,500 per eligible college student for tuition, fees, books, supplies and equipment.
Lifetime Learning Tax Credit
A nonrefundable credit up to $2,000 per tax return is available to help subsidize postsecondary education costs well beyond just the first 4 years.
Student Loan Interest Deduction
If you or dependents took out student loans to finance higher education, you can deduct up to $2,500 in interest paid. Income restrictions do exist.
529 Contribution State Tax Deduction
Many states allow state tax deductions for contributions to a Section 529 college savings account. Additionally, 529 funds can grow and be withdrawn tax free when used for qualified education expenses.
Other Important Family and Child-Related Tax Breaks
Along with credits and deductions already mentioned, other notable tax-savings opportunities exist for parents and guardians:
Adoption Tax Credit
Parents can get a tax credit for up to $14,300 (2021) for qualified adoption expenses. The credit is nonrefundable so taxes owed would need to be that high to get full amount back.
Child and Dependent Care Tax Exclusion
Instead of Child and Dependent Care Tax Credit, some parents can exclude up to $5,000 in benefits from an employer-sponsored dependent care flexible spending account from taxes. Restrictions apply.
Earned Income Credit
The Earned Income Credit is partially refundable based on investment and taxable interest income limits. Having qualifying children substantially boosts how much EIC is available too.
Child Disability Tax Credits
Families with children with disabilities under 17 may qualify for a nonrefundable Child Disability tax credit up to $3,000 per family based on costs to accommodate and care for the child.
Conclusion
The tax code offers notable credits, deductions, and incentives to help ease the financial burden of raising kids and supporting a household. Learning how these 14 parental tax breaks work, including income limits and phaseouts, enables families to get back as much money as legally possible each tax season. Consult a tax professional to confirm eligibility and ensure you are receiving optimal savings.
