With parenthood comes many rewarding experiences – and expenses. You hear about how expensive it is to raise a child, but you never really know what to expect until that little bundle of joy enters your life. From diapers, pre-school, extracurricular activities and saving for college, the costs of raising kids adds up fast. My wife and I welcomed our daughter into our family last year; and this life-changing event got me thinking: What tax breaks are available to families?
Relief for New Parents
Families of all kinds can take advantage of a variety of tax incentives, which can ease some of the financial burden. From deductions to credits, this list will give you a good idea as to what is available to you.
- Adoption Credit
- A credit of up to $13,190 – dollar for dollar of qualified expenses – is available to families who have adopted children.
- Qualified expenses include adoption fees, attorney fees, court costs, etc.
- Adopting a child with special needs results in the full credit amount regardless of whether qualifying expenses were made.
- Child Credit/Additional Child Credit/Dependent
- Child Credit – This credit applies to up to $1,000 for qualifying children younger than 17. This credit is generally non-refundable, but the taxpayer may be able to qualify for the additional child credit if he/she has enough earned income.
- Additional Child Credit – Part of the child credit may be refundable for taxpayers with more than $3,000 worth of earned income.
- Dependent – Each child listed on a tax return may be eligible to be listed as a dependent, which results in an additional $3,950 exemption per dependent.
- Earned Income Credit
- This is one of the largest credits available to taxpayers and claiming it can save you thousands of dollars in taxes. Taxpayers with three or more children and who have earned income as high as $52,427 may qualify for the earned income credit. This credit generally decreases with fewer qualifying children or for those with higher income levels.
More To Know As They Grow
In addition to child and earned income credits, here are some additional ways to save on your taxes as your children continue to grow.
- Dependent Care Credit
- This non-refundable credit goes toward a portion of a dependent’s child care expenses. Common qualifying expenses include day care, pre-school, day camps and similar programs.
- Preempting College Costs
- Education Savings Accounts allow taxpayers to contribute up to $2,000 per year for children younger than 17. While there are no tax benefits for the year of the contribution, distributions toward qualified higher education expenses (including earnings on contributions) are tax-free. Taxes and penalties may apply if the funds are not used for qualified education expenses.
- State College Savings (529 plans) allow taxpayers to make contributions to an investment account and take a deduction toward their state income tax. (There is no federal income tax deduction available when taking this option.) Similar to education savings accounts, taxes and penalties may apply to funds used on unqualified expenses.
- Flexible Spending Plans
- If you have a flexible spending plan through your employer, remember that your child-related medical expenses qualify under the plan too. The funds you already contribute to your plan are deducted pre-tax up to certain thresholds. But don’t forget to use the entire amount withheld in your plan before March 15 of the following year or you will lose it.
The College Years
It probably seems like it was just yesterday that your son or daughter was crawling across the living room floor – now you are preparing to send them off to college. But just because they are all grown up doesn’t mean that the tax incentives end. Here are some tax perks to help during your child’s transition into adulthood:
- Dependency Extension
- You can claim your child as a dependent until they are 19-years-old as long as you continue to provide more than half of their support and they lived with you for more than half the year. You may also continue to claim your child if they are younger than 24 and a full-time student.
- Tax Relief For Education
When it comes to paying for higher education, there are a few opportunities for tax relief. Below are a few of your options. Remember that you may only claim one of these options. A financial advisor can help you determine which option is right for you.
- You can claim the American Opportunity Credit for up to $2,500 (100 percent of the first $2,000 and 25 percent of next $2,000) for qualified education expenses. This tax credit is only available for undergraduate students. Qualified expenses include tuition, fees, books, supplies, etc. This credit is also 40 percent refundable.
- Qualified education expenses, such as tuition, fees, books, etc., qualify you to claim the Lifetime Learning Credit, which could total up to $2,000 (20 percent of up to $10,000). Even though this credit is entirely nonrefundable, it helps reduce your tax bill.
- If you are paying for tuition, fees, books and other school supplies for your student, you may find this above the line deduction of up to $4,000 for these expenses to be beneficial.
- Student Loan Relief
- Help is also available to those making payments on student loans. An above the line deduction of up to $2,500 is available for interest paid on education loans.
In addition to being expensive, taking care of children can be confusing at times. Claiming these tax deductions and tax credits doesn’t have to be. Email Rea & Associates to learn more.
By Jordan Miller, CPA (Millersburg office)