We all know that raising children is expensive. But there is one time of year when being a parent pays off financially, and that is at tax time.
"There are a multitude of tax breaks for parents," says Lisa Greene-Lewis, a CPA, tax expert for TurboTax and U.S. News contributor. "You spend a lot on kids, but there are definitely some good deductions out there."
First of all you, you can claim any child as a dependent who is younger than 19 (or 24 if he or she is a full-time student) or permanently and totally disabled. This can also include grandchildren or other qualifying relatives you support.
If you're separated or divorced, only one parent can claim each child. If your child is old enough to file her own tax return, she can't take a personal exemption if you claim her as a dependent. That means both parties have to do some math to determine which options work best for your family.
When you're filling out your tax return, each household member gets a $4,050 personal exemption, which means that you get to subtract $4,050 from your taxable income. A family of four, for example, would get $18,200 in exemptions.
"Most people in lower-income brackets do not pay any income tax," says Jeff Schnepper, a tax attorney in Cherry Hill, New Jersey, and the author of "How to Pay Zero Taxes 2017: Your Guide to Every Tax Break the IRS Allows." "They do pay Social Security and Medicare taxes."
Parents are eligible both for tax credits, which are subtracted from your total tax bill and in some cases provide a refund, and tax exemptions, which decrease the amount of the income upon which you are taxed.
"There's a slew of tax breaks for parents," says Barbara Weltman, an attorney and a contributing editor for "J.K. Lasser's Your Income Tax 2017."
Here are seven tax breaks parents can take advantage of when filing their taxes :
Earned Income Tax Credit. This tax credit is for low- and moderate-income taxpayers, including those without children, though it's more valuable if you have children. "It's a credit for working parents," Greene-Lewis says. If you don't have kids, your income can't be more than $14,880 ($20,430 if married filing jointly). With one child, the income limits are $39,296 and $44,846. With two, the income limits are $44,648 and $50,198. With three or more children, the limits are $47,955 and $53,505. If you have more than $3,400 a year in investment income, you don't qualify. The credit is $510 with no children, $3,400 with one, $5,616 with two and $6,318 with three or more children. This is a refundable tax credit, which means you could get a refund without paying any taxes.
Child Tax Credit. This credit shaves up to $1,000 off your tax bill for each dependent child under 17 if your income is under $75,000 for a single parent or $110,000 for a couple. For higher-income earners, the credit is cut by $50 for each $1,000 of income above those amounts. This credit is not refundable, so it only counts up to the amount of tax you owe. But if you have at least $3,000 in earned income, you may be eligible for the Additional Child Tax Credit, a separate credit that does refund more than you have paid.
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American Opportunity Tax Credit. This credit offers up to $2,500 per year per student toward the first four years of college education. To be eligible, your income must be $80,000 or less ($160,000 if married filing jointly). Those with incomes up to $90,000 (or $180,000 per couple) can get a reduced credit. "Forty percent of the credit is refundable, even if it's more than what you owe," Weltman says. You can use this for your child, your spouse or yourself. If your child is not a dependent on your return, he may be able to claim the credit on his own return.
Lifetime Learning Credit. This also is a tax credit for education expenses, but you can't claim this and the American Opportunity Credit for the same student. You can claim a maximum of 20 percent of the first $10,000 of eligible expenses for tuition and fees, or a credit of $2,000. The credit begins phasing out at $55,000 in modified adjusted gross income ($111,000 for a couple) and ends entirely if you earn more than $65,000 (or $131,000 for a couple). You can use this credit for you, your spouse or your child.
Child and Dependent Care Credit. This credit is designed for working people, so parents claiming the credit must have earned income or be in school. It's worth less at higher income levels, but there is no top income limit. It provides a tax credit of 20 to 35 percent (depending on income) of $3,000 in expenses for one child or $6,000 for more than one child who's 12 or younger. The credit can also be used toward care for disabled adults in the family. If your income is higher, you might save more by paying childcare expenses through a flexible spending account, which allows you to use up to $5,000 in pretax money toward child care.
Single head of household status. Single people with dependents are eligible to file as head of household, which provides a larger standard deduction ($9,600 versus $6,300) if you don't itemize and more favorable tax brackets.
Employ your kids. If you own a business, you can hire your child to do age-appropriate tasks such as filing papers, proofreading documents or providing computer tech support. The first $6,300 earned by each child is tax-free and any additional income is taxed at the child's tax rate, which is usually lower than the parents' rate. The paperwork required depends on whether the child is over or under 18 and the type of business entity. "Basically, what you're doing is income shifting," Schnepper says. Because the child has earned income, she also gains the option of contributing to a retirement account.