3 Biggest Tax Cuts for Parents
Having children requires sacrificing not only time but also money. According to a Motley Fool Ascent study, raising a child from birth to age 17 costs approximately $300,000. And, as you know, this doesn’t even take into account the cost of college.
But the good news is that as a parent, you may be eligible for certain tax credits when you file your taxes. This is a very good thing. That’s because, unlike tax deductions that simply exempt a portion of your income from taxes, credits reduce your tax burden on a dollar-for-dollar basis.
In other words, a $1,000 tax deduction can save you more than a $1,000 tax deduction. With that in mind, here are some big tax breaks in the form of credits every parent should know about.
Read more: We’ve researched free tax software and compiled a list of the best options here.
1. Child Tax Credit
The child tax credit received a major boost in 2021 as part of lawmakers’ massive stimulus package that year. The increase was not extended beyond 2021, leading some to believe the Child Tax Credit is gone. But this is not true. It simply reverts to the previous maximum amount (currently $2,000 per child under 17).
Now, some tax credits are non-refundable, so it’s best to reduce your tax liability to $0. The Child Tax Credit is partially refundable up to $1,600 per child. However, a proposal is in the works that would expand refundability for the child tax credit in 2023.
Another advantage of the child tax credit is that it is not just for low-income people. You can claim the full deduction if your income is $200,000 or less for single filers or $400,000 or less for married couples filing jointly.
If you exceed these limits, your credit will not automatically disappear, but will begin to decline. If your income is high enough, you may not get anything even if you have qualifying children.
2. Child and dependent care deduction
The maximum value of the child and dependent care credit is $2,100, but the amount you can receive depends on three factors:
- Expenses spent on childcare
- How many children do you have?
- What is your income?
This non-refundable credit allows you to claim 20% to 35% of your child care costs. However, you can only apply the appropriate percentage to child care expenses up to $3,000 for one qualifying child and up to $6,000 for two or more qualifying children.
Is your head still spinning? Yes, these credits will help you.
Below is an example showing how credits are calculated. Let’s say you have two children and spend $10,000 a year on child care. Your maximum claim limit is $6,000 for child care, so forget about the extra $4,000 you spent.
Now let’s say you make over $43,000 per year. In this case, you can only claim 20% of $6,000, or $1,200. If you earn less than $15,000 and much less, you can claim 35% of $6,000, or $2,100. On the other hand, if your income is less than $15,000, you are unlikely to be able to afford $6,000 in child support.
At first, the child and dependent care credit may seem a little silly because it can only write off a limited portion of your overall expenses. However, if you pay for child care, you can also contribute to a dependent care FSA, which allows you to allocate up to $5,000 (or $2,500 if married and filing separately) in pre-tax dollars for child care expenses.
Now, remember that $5,000 is not a tax credit, so you can’t cut $5,000 from your tax bill. However, if you’re in the 22% tax bracket, you can save $1,100 by exempting that much income from taxes.
3. Earned Income Tax Credit
The Earned Income Tax Credit (EITC) is a unique credit in that it is fully refundable. You also don’t have to be a parent to claim it, but you’re more likely to qualify if you have children.
Eligibility for the tax credit depends on your income and the number of eligible children in your household. You can refer to this table to see if you qualify and what the credit is worth to you.
Unfortunately, about 20% of eligible tax filers miss out on the EITC each year. So it’s a good idea to run the numbers (ideally using tax software) to see if you qualify.
Becoming a parent can be difficult from a financial perspective. Thankfully, the IRS throws parents a bone in the form of these tax credits, so it’s a good idea to check to see if you qualify for them.
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