Do You Qualify for the Child or Child Care Tax Credit?
Raising a child is a fulfilling but increasingly expensive endeavor. The average cost of raising a child to age 17 easily tops $200,000. Fortunately, there are a number of tax credits that parents and guardians can tap into to help defray the costs.
In this article:
- Child care tax benefits: An overview
- Federal child tax credit
- Child and dependent care credit
- Earned income tax credit
- Medical expenses deduction
- Other tax credits
- Government programs for low-income families
Child care tax benefits: An overview
There are a number of federal and state programs dedicated to helping middle- and lower-income families minimize the monetary cost of child care. The most significant aid that the federal government offers is at the tax level. Tax laws can be confounding, especially given that there are a number of credits that parents and guardians can simultaneously apply for. With a little bit of patience and extra paperwork, you can funnel a few thousand dollars of your yearly income away from the tax man and toward your day-care costs.
The trio of federal tax credits that most tax experts recommend applying for is the federal child tax credit, the child and dependent care credit, and the earned income tax credit. Beyond that, there are myriad other perks that families of minors and students can take advantage of to help alleviate the cost of child-rearing.
Federal child tax credit
The federal child tax credit offers up to $1,000 per child under 17 at the end of the year. You can take advantage of the full credit only if your income is under $110,000 for married filing jointly, $55,000 for married filing separately, or $75,000 for single head of household. However, if your income goes above that threshold, your credits are phased out by $50 of each $1,000 you earn above the limit. This means that anyone with income below $130,000, $75,000, and $95,000, respectively can claim at least some of the credit.
Before downloading the number of forms required for filling for the federal child tax credit, look at the following test for eligibility to determine whether your family qualifies for the credit.
- What is your relationship to your child? The child tax credit applies to dependents including your biological child, stepchild, foster child, adopted child, brother, sister, stepbrother, stepsister, or any of their children (grandchild, nephew, etc.).
- What is your child's age? The child tax credit can be claimed only for dependents who are under age 17 at the end of the year. Parents of teenagers often overlook this benefit as their kids outgrow the need for a babysitter. Legally, you can continue to file for the credit until your children reach the maximum age cutoff of 17.
- How much support did you provide your child during the last tax year? The child must be filed as dependent on your tax returns and cannot file his or her own tax return. Furthermore, you must have provided at least half of your child's support during the past year.
- Has your child lived with you for at least half the year?
- Is your child a U.S. citizen, U.S. national, or U.S. resident alien?
The credit is also refundable, up to 15% of earnings over $3,000. Moreover, California, Oklahoma, New York, and North Carolina offer state child tax credits in addition to the federal one.
The form: 1040, Schedule 8812
Child and dependent care credit (the child tax credit)
The child and dependent care credit offers relief if you had to pay for child care while working or looking for work. The requirements for this credit are a bit more complex and restrictive than the straight-up child tax credit. First, you must determine whether the person being cared for is a "qualified individual":
- A dependent child under age 13 when the care is provided, or ...
- A spouse who is incapable of caring for himself or herself, and who lived with you for at least half the year, or ...
- A dependent who is incapable of caring for him or herself, and who lived with you for at least half the year, regardless of:
- o The dependent's gross income.
- o Whether the dependent files a joint tax return.
- o Whether you are another taxpayer's dependent.
If your child qualifies as a dependent, you must now ask yourself:
- Were the expenses incurred required for you to remain gainfully employed?
- Is the qualifying child 12 years old or younger?
- How much support did you provide your child or dependent during the last tax year?
- How did you claim the child? The child and/or dependent you are filing for must be claimed as dependent on your tax return, and he or she cannot have provided more than half of total care costs alone.
- Have you met the requirement of filling jointly if you are married?
- Is the caretaker you paid for your spouse, a parent of the child, another child of yours under age 19, or a dependent of your spouse? If so, you cannot apply for the credit.
As long as you meet these requirements, you are qualified to apply for the child and dependent care credit. When filing for this credit, keep in mind that qualifying expenses go beyond physical care but extend to household expenses such as cooking and cleaning. The maximum creditable expense is $3,000 for a single dependent household. Currently, 24 states offer a version of the dependent care credit; eight of those are refundable.
The form: Form 2441
Earned income tax credit
Passed in 1975, the EITC is designed to help low-income, working families. Enacted in 1975, the EITC is one of the few tax credits that can become refundable if the filed credit exceeds the tax liability. This means that if you're due to receive a credit of $5,000 but you owe only $2,000 in taxes, you can get a check for $3,000 instead of having that money vanish.
The EITC is based on a fixed percentage of earnings until a phase-out limit that varies depending on the composition of your family. After the phase-out threshold, the credit decreases until it reaches zero. The maximum possible benefit is $6,000 for a family with two children and $3,000 for a family with a single child.
Check out the IRS website to see whether you qualify for the EITC.
Medical expenses deduction
If your child has special physical, mental, or dietary needs, you might be able to deduct them as medical expenses. Generally speaking, you can deduct your and your dependents' medical expenses in excess of 7.5% of your adjusted gross income. This means that if your AGI was $100,000 and you spent $8,000 on your and your child's medical expenses, you can deduct $500.
The term "medical expenses" encompasses more than you might think:
- The extra cost of gluten-free foods over comparable regular foods, if your child has a gluten allergy.
- Transit to and from doctors' offices.
- Private schools and programs, if your child needs them to accommodate a disability.
- Therapeutic materials, such as adaptive headphones.
- Special instruction, such as speech therapy or remedial reading lessons.
- Attending a disability conference to obtain medical information.
- Exercise such as yoga or horseback riding, if recommended to treat a specific condition.
- Home improvements related to a disability (costs over the increase in the home's fair market value are deductible).
Other tax credits
American opportunity tax credit
College kids: Deduct course materials, tuition and fees
Phase-out over $80,000/$160,000
Coverdell education savings accounts (education IRAs)
Education: You can contribute up to $2,000 a year until the child is 18, and the gains will be tax-free if used for educational expenses
$2,000 annual contribution limit
If funds aren't used for education, gains will be taxed and subject to a 10% penalty
Adoption tax credit -- regular adoption
Adoption expenses: For children under 18 or disabled, covering expenses such as adoption fees, court costs, and traveling costs
$12,650 per child
Adoption tax credit -- special needs
Adoption: In the year of finality, you can claim the full credit if the child has special needs (including most foster children)
$12,650 per child
Flexible spending account (offered by employers)
Employed parents: Money disbursed from an FSA can cover care for dependents while the parent is at work
$5,000 annual contribution limit
FSA funds are pre-tax but expire if unused
Government programs for low-income families
Besides tax breaks, there are a bevy of other aid programs that provide direct or monetary support for health care, child care, and housing for children. Find out what programs there are and whether you qualify by using this benefit finder.
Children's Health Insurance Program: Even if your income is too high for Medicaid, your children can still get insured up to age 19 with CHIP. Since CHIP is state-funded, each program has a different name, including Healthy Families in California, and Hoosier Healthwise in Indiana. Though the federal income cap is $45,000 for a family of four, many states allow incomes higher than that.
CHIP provides free preventative services, though there might be copays for other services, and many states charge a monthly premium. However, the total costs cannot exceed 5% of your monthly income.
Temporary Assistance for Needy Families:TANF, which replaced the Aid to Families with Dependent Children in 1997, provides cash assistance to needy families out of work. The block grant provides cash assistance to families out of work. You can receive benefits for a maximum of 60 months, though some states impose a shorter time limit. While families are receiving TANF benefits, the adults are required to find a job within 24 months. States are allowed to implement their own rules and requirements in addition to these.
Supplemental Security Income: If your child is disabled and under 18 (or is under 22 and a student), and you meet income qualifications, you might qualify for SSI. The income cutoff for a family of three ineligiblechildren is $52,668 for a single-parent household and $61,212 for a two-parent household. The Social Security benefit screening tool can help you determine your eligibility.
Head Start and Early Head Start: Head Start is a federal program that fosters intellectual, physical, and social development in low-income children up to 5 years old. You may be eligible if your family's income is below the poverty line, if you have special circumstances, or if your child is in foster care, receiving TANF or on SSI. Head Start itself serves preschool-age kids and families; Early Head Start works with infants, toddlers, and pregnant women. Depending on the community's needs, Head Start may take the form of day care or preschool, family child care homes, or visits to the child's own home. The Head Start locator lets you find a program near you.
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