Parents may qualify for helpful tax breaks on everything from child care to educational costs and even supplies, in some cases.
For information on the third coronavirus relief package, please visit our “American Rescue Plan: What Does it Mean for You and a Third Stimulus Check” blog post.
The costs of raising a child, such as for child care, general costs of living and college tuition, can really add up and are often on the rise. But parents may find some relief at tax time with tax credits for education, child care and for simply having children.
Child tax credits
Many of the tax breaks for parents pertain to child care and education, but the easiest tax break of all is for simply having children. One of the most used credits for having children is the Child Tax Credit.
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 were not eligible for the credit.
The Child Tax Credit changes for 2021 have lower income limits than the original Child Tax Credit. Families that do not 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 tax.
New, Temporary Advance Child Tax Credit Payments
The Child Tax Credit has been expanded by the American Rescue Plan Act, that was enacted in March of 2021. Part of this expansion is 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 do not need to do anything to get their advance payment. Normally, the IRS will calculate the payment amount based on your 2020 tax return. Eligible families will receive advance payments, either by direct deposit or check.
The amount that you receive will be reconciled to the amount that you are eligible for when you prepare your 2021. Most families will receive about one-half of their tax credit through the advance payments. If you receive too little, you will be due an additional amount on your tax return. In the unlikely event that you receive too much, you might have to pay the excess back, depending on your income level.
For updates and more information, please visit our 2021 Child Tax Credit blog post.
If you're doing your 2020 or earlier taxes, here's what you should know about the Child Tax Credit
For tax years beginning with 2018, the Child Tax Credit is doubled to $2,000 per qualifying child with a refundable portion of up to $1,400 with the Additional Child Tax Credit. The phaseout for the new credit begins at:
- $200,000 for single filers and
- $400,000 for joint filers.
For tax years prior to 2018, the Child Tax Credit provides up to $1,000 for every child under 17 in your care if you meet certain income requirements.
- Those filing a joint return will see the amount of the credit begin to phase out if their adjusted gross income exceeds $110,000.
- The phase-out starts at $75,000 for single parents.
The number of children you have also figures into your eligibility for the Earned Income Tax Credit, which can significantly reduce the amount of tax you owe. In 2020, you are eligible for the Earned Income Tax Credit if you have three or more children and earned less than
- $50,594 as a single person, or
- $56,844 as a married couple filing jointly.
- The income thresholds then drop according to the number of children you have.
Parents may also get a break if they're spending a lot of money on child care.
For 2020, the child and dependent care credit can cover up to 35% of child-care expenses, or up to $3,000, for a child under 13. A second child may also qualify you for up to $3,000. Your employer may also exclude up to $5,000 from your taxable wages for qualified child-care expenses. The employer deduction may not be added on top of the Child and Dependent Care Credit, so it's not as sweet if you have more than one child.
- The amount of qualifying expenses increases from $3,000 to $8,000 for one qualifying person and from $6,000 to $16,000 for two or more qualifying individuals
- The percentage of qualifying expenses eligible for the credit increases from 35% to 50%
- The beginning of the reduction of the credit is increased from $15,000 to $125,000 of adjusted gross income (AGI).
Also for tax year 2021, the maximum amount that can be contributed to a dependent care flexible spending account and the amount of tax-free employer-provided dependent care benefits is increased from $5,000 to $10,500.
These new provisions can significantly improve the bottom line of your 2021 tax return (the taxes you file in 2022) if you’re a working parent responsible for the cost of the care for your dependents.
School tax benefits
A slew of tax benefits are available if you're putting your children through school. Some states offer benefits for parents paying for parochial-school tuition and supplies for children in kindergarten through high school. But federal education benefits are typically just for college or post-secondary education.
- As with child care, federal education benefits come in the forms of credits and deductions.
- These benefits do not overlap, however, so you must know which ones you are eligible for and which to claim.
The American Opportunity Credit, which expands on and replaces the Hope Credit, allows for a tax credit of up to $2,500 for tuition and related expenses for each of the first four years attending college at least half-time.
- Individuals who earn no more than $80,000 and couples earning no more than $160,000 are eligible for the full American Opportunity Credit.
- The credit phases out over the next $10,000 of income ($20,000 if married filing jointly).
The Hope Credit had lower income limits, a maximum credit of $1,800, did not cover books and other supplies, and was good only for the first two years of college.
The Lifetime Learning Credit has lower income limits and applies to students in non-degree and career skills training programs. Eligibility for the Lifetime Learning Credit is capped at,
- $68,000 for single filers and
- $136,000 for couples filing jointly in 2019.
- The maximum benefit is $2,000.
There are some key differences to consider when choosing between the American Opportunity Credit and the Lifetime Learning Credit:
- The Lifetime Learning Credit is available on a per-household basis, while the American Opportunity Credit is available on a per-student basis.
- The Lifetime Learning Credit doesn’t take into account felony drug convictions, is available year after year, and requires enrollment in only one course.
- The first 40% (up to $1,000) of the American Opportunity Tax Credit is refundable, which means you can receive that amount even if your tax is zero.
When you use TurboTax to prepare your taxes, we’ll recommend the credit that gives you the best tax outcome.
If you don’t claim either of the education tax credits, you might still have the option to deduct up to $4,000 of tuition and fees. The income limits for the tuition and fees deduction are,
- $80,000 for single taxpayers and
- $160,000 for married couples filing jointly.
- However, this deduction ends at the end of 2020.
Qualified tuition plans, or 529 plans, offer yet another way to save on taxes while providing for your child’s education. A 529 plan is not a deduction or a credit. It’s a tax shelter.
The state-by-state 529 plans authorized by the Internal Revenue Service allow you to invest and earn interest on the funds without subjecting you to federal income taxes. In many cases, it also wipes out state income taxes.
- You must ensure that the withdrawals are spent on eligible education expenses, including tuition and room and board.
- Beginning in 2018, these qualified education expenses include private school tuition for kindergarten through high school.
- If you don't spend the money on qualified expenses, you’ll get hit with income taxes after the money is spent.
The Securities and Exchange Commission recommends you assess your overall financial situation before starting a 529 plan. After all, there's no point in depositing money into a restricted account for future savings if you're presently struggling to pay the bills.