No one ever said raising kids would be a cost-effective undertaking. But, after your initial "investment" in diapers, baby food and all the other necessary bells and whistles, the financial perks of having children come at tax time. Tax credits and deductions for parenting expenses can result in a lower tax bill and a higher refund.
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Key Takeaways • The Child Tax Credit is worth up to $2,000 per qualifying child (tax year 2023). The credit directly lowers your tax bill on a dollar-for-dollar basis. • You may qualify for a Child and Dependent Care Credit if you had qualifying child care expenses for children who were under 13 at the end of the year and you meet other requirements. • If you earn income and meet the income requirements, you may qualify for the Earned Income Credit (EIC). • If you adopted a child during the tax year, the Adoption Credit can offset some of the qualifying costs, including court and attorney fees. |
1. Dependent exemption
For tax years prior to 2018, your child was likely your dependent and eligible for the dependent exemption. An exemption, much like a deduction, reduces your taxable income, which can lower your tax obligation.
Children qualifying for the dependent exemption had to be under 19 years of age at the end of the year to qualify (under 24 for students). If the qualifying child was permanently disabled, the age restriction didn't apply.
Beginning in 2018, the dependent exemption has been replaced with dependent credits such as the increased Child Tax Credit - see below.
You can file a new W-4 form with your employer to claim additional withholding allowances. Since claiming an extra dependent likely will cut your tax bill, it also means you should be able to cut back on tax withholding from your paycheck.
2. Child Tax Credit
A tax credit directly lowers your tax bill dollar-for-dollar and the Child Tax Credit often provides one of the biggest credits for taxpayers.
For tax year 2023, here's what you should know about the Child Tax Credit
The Child Tax Credit of $2,000 could lower your tax obligation by thousands of dollars if you have several children. Some of the requirements include:
- Under age 17 at the end of the year
- Your own child, stepchild, foster child, brother, sister, stepbrother, stepsister, half brother, half sister, or a descendant of any of them (for example, your grandchild, niece, or nephew)
- Claimed as a dependent on your taxes
- A US citizen, national or resident alien
- Living with you more than half of the year
Moderate-income households can benefit from the Child Tax Credit. Javier and his wife Sara used the credit after they took in teenage nephews at their Modesto, CA home.
"Every penny counts ... We all look forward to getting something back at the end of the year, or at least, breaking even. I think that it's very beneficial to all families who have children," says Javier of the tax break.
"Many parents work hard to make ends meet, so it's important to have some help like the Child Tax Credit," he adds.
Stimulus impact on the Child Tax Credit for 2021
Child Tax Credit Changes
The American Rescue Plan raised the maximum Child Tax Credit in 2021 to $3,600 for qualifying children under the age of 6 and to $3,000 per child for qualifying children ages 6 through 17. Before 2021, the credit was worth up to $2,000 per eligible child, and 17 year-olds weren't eligible for the credit.
The Child Tax Credit changes for 2021 have lower income limits than the original Child Tax Credit. Families that don't qualify for the credit using the revised income limits are still eligible for the $2,000 per-child credit using the original Child Tax Credit income and phase-out amounts.
In addition, the entire credit is fully refundable for 2021. This means that eligible families can get it, even if they owe no federal income taxes.
Temporary Advance Child Tax Credit Payments
The Child Tax Credit was expanded by the American Rescue Plan Act, that was enacted in March of 2021. Part of this expansion was to advance the 2021 tax credit to families by sending them direct payments during 2021 rather than having them wait until they prepare their 2021 taxes in 2022. Most families didn't need to do anything to get their advance payment. The IRS calculated the payment amount for most families based on your 2020 tax return. Eligible families received advance payments, either by direct deposit or check.
The amount that you received needs to be reconciled to the amount that you are eligible for when you prepare your 2021 tax return. Most families received about one-half of their tax credit through the advance payments. If you received too little, you will be due an additional amount on your tax return. In the unlikely event that you received too much, you might have to pay the excess back, depending on your income level.
3. Child and Dependent Care Credit
You may qualify for a Child and Dependent Care Credit if:
- You had child care expenses for children who were under 13 at the end of the year.
- The child care allowed you either to work or to look for a job.
- You (and your spouse, if married) earned income during the tax year.
TurboTax Tip: You can deduct up to $2,500 of interest payments on qualified student loans.
4. Earned income tax credit
Working parents with modest incomes may qualify for the Earned Income Credit (EIC). The amount of credit depends on the number of children you have and your income for the tax year, since income limits apply. The EIC can reduce your tax bill and may result in a refund even if it lowers your tax obligation to zero.
5. Adoption Credit
The Adoption Credit can offset the costs of adopting a child. Income limits apply, and you can only claim a certain dollar amount per adoptive child. Some of the expenses that may qualify for this credit include:
- Court and attorney fees
- Related travel expenses
- Related meal expenses
Adopting a child with special needs can allow you to claim the entire adoption credit, even if it exceeds your actual expenses. However, it's nonrefundable, so it can't exceed the amount of your actual tax liability.
6. Higher education tax credits
Parents can claim two credits for higher education:
The AOTC can be used for up to four years. The LLC has no limit on the number of years it can be claimed as long as your child has higher education qualified expenses.
Qualified expenses include:
- Tuition
- Enrollment fees
- School materials
Personal living expenses, such as room and board and transportation, don't qualify. Income limits apply, and you can receive a refund of a portion of the AOTC, even if it results in zero tax obligations.
7. Student loan interest deduction
Parents can deduct interest payments on certain student loans. The deduction can reduce the amount of taxable income, and possibly lower your tax bill. For example, you can reduce your taxable income up to $2,500.
Student loans must come from a qualified lending institution—not a relative—and your child had to be enrolled at least half-time in a degree program when the loans were originated. Income limits apply based on filing status.
8. Self-employed health insurance
Self-employed parents often must pay for their own and their family's health insurance. If you're self-employed, generally, you can deduct 100% of the cost of health insurance premiums paid for family including children under the age of 27.
This includes medical, dental, and long-term care premiums, even if your adult child isn't a dependent. The deductions can't exceed the amount your business earns, and you can only take the deduction if you and your spouse are ineligible for an employer-paid plan.
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