Tax benefits of having a child: A guide for new parents
There's no way around it—being a parent is expensive. On average, you can expect to spend more than $310,000 raising a child from birth to age 17, and that's not including the cost of college. Fortunately, the tax benefits of having a child can help ease this financial burden.
How does having a child affect your taxes? It may reduce your tax liability through various credits and deductions. Here's a list of seven tax breaks you may be able to claim when you file your tax return.
1Child Tax Credit
The Child Tax Credit provides up to a $2,000 credit per qualifying child, depending on your income. Up to $1,700 of this credit is refundable, meaning you'll get this money as a tax refund if the credit amount is larger than any tax you owe. Your child likely qualifies for this credit if they:
- Are under age 17
- Receive more than half their financial support from you
- Live with you for at least 6 months during the year
- Meet US citizenship requirements
Biological, step and adopted children qualify for the credit, provided they meet the criteria. This credit may also apply when claiming a foster child on taxes, as well as other dependents—including biological siblings or stepsiblings, nieces, nephews and grandchildren.
Am I eligible for the Child Tax Credit?
You can receive the full amount of the Child Tax Credit if your income is $200,000 or less. The limit is $400,000 if you file jointly, but you may be eligible for a reduced credit if your income exceeds those limits.
2Family Tax Credit
If your dependents don't meet the criteria for the Child Tax Credit, you may still be eligible for a $500 nonrefundable Family Tax Credit. However, you must be able to claim the child as a dependent on your tax return and meet the income requirements.
Am I eligible for the Family Tax Credit?
To claim the full credit, your income must be $200,000 or less—or less than $400,000 if you file jointly. The credit decreases by $50 for every $1,000 your adjusted gross income exceeds those limits.
Does my dependent qualify?
Use this free IRS tool to understand whether your child or other dependent qualifies for the Child Tax Credit or the Family Tax Credit.
3Child and Dependent Care Credit
The Child and Dependent Care Credit, also known as the Daycare Credit or the Child Care Tax Credit, is designed to offset the cost of child care while you work or look for a job. Care may be provided in your home, or you can enroll your dependent in a qualified off-site program.
You can claim up to $3,000 in expenses for one dependent or $6,000 for two or more dependents. Your credit amount will be based on your income and may be up to $1,050 for one dependent and $2,100 for multiple dependents.
When claiming the Child and Dependent Care Credit, you must subtract any employer-based dependent care benefits from your expenses. If you're married but file separately, you may be ineligible for this credit.
Can I claim both the Daycare Credit and the Child Tax Credit?
You can claim both the Daycare Credit and the Child Tax Credit on your tax return if you meet the eligibility requirements for each one independently. The tax savings from these credits is designed to help families manage child care expenses.
4Earned Income Tax Credit
The Earned Income Tax Credit, or EITC, is a refundable tax break designed to help low- to moderate-income families. If eligible, you may claim a credit ranging from $4,213 to $7,830, depending on your income and how many qualifying children you have.
How do I qualify for the Earned Income Tax Credit?
To qualify for the EITC, the total of your earned income and investment income must be under a certain threshold. For example, if you're married, file jointly and have three qualifying children, your combined earned income can't exceed $66,819. You also can't claim the credit if you received more than $11,600 in investment income during the year. Qualifying dependents generally must be under 19 at the end of the year. However, if a dependent has a disability, they qualify regardless of their age.
5Adoption Tax Credit
Prospective parents who are planning to adopt should check out the Adoption Tax Credit. This credit can help offset up to $16,810 in qualified expenses incurred during the adoption process. Qualified expenses may include a home study, travel expenses, adoption fees, attorney fees and court costs. This credit is nonrefundable, but you can carry over any excess credit amount for up to 5 years, reducing your future tax liability.
Can I claim the Adoption Tax Credit?
To be eligible for the full amount, your modified adjusted gross income, or MAGI, must be equal to or less than $252,150. You may qualify for a reduced credit with a MAGI of up to $292,150. However, individuals who adopt their spouse's child are not eligible for this credit.
6Education credits
If you're the parent of a dependent student, you may be eligible to claim two tax credits—the American Opportunity Tax Credit and the Lifetime Learning Credit. Here are some general comparisons.
American Opportunity Tax Credit |
Lifetime Learning Credit |
|
|---|---|---|
Amount |
Up to $2,500 per student per year |
Up to $2,000 per year |
Refundable |
Up to $1,000 refundable |
Nonrefundable |
Who's eligible |
Students pursuing an undergraduate college degree |
Students pursuing a degree, attending vocational school or taking a course to improve job skills |
Qualified expenses |
Include tuition, mandatory fees, books and supplies |
Include tuition and mandatory fees |
Time limit |
4-year limit |
Good for unlimited tax years |
Am I eligible for education credits?
You may be eligible to claim the full amount of either credit if your MAGI is $80,000 or less, or $160,000 if filing jointly. Those whose MAGI exceeds $90,000—or $180,000 if filing jointly—are ineligible for these credits. However, you can't claim both credits for the same student or the same qualified expenses. Likewise, you can't claim these credits if you're married but file separately.
7Deductions for medical expenses
If you itemize deductions on your tax return, you may be able to write off any qualified medical expenses that exceeded 7.5% of your adjusted gross income for the year. In addition to deducting the cost of healthcare expenses for your family, you may also deduct some expenses related to pregnancy and birth.
Qualified medical expenses may include your hospital stay, prenatal care and delivery, related prescription medication, transportation to receive care, supplies to assist with lactation and insurance premiums. However, you can't deduct expenses that your insurance company covered or premium costs that your employer paid.
It's important to note that itemizing is only worthwhile if the total of all your deductions will exceed the standard deduction the IRS allows for everyone in your household. It's a good idea to work with a professional to determine whether itemizing or taking the standard deduction will save you the most money.
How to claim tax breaks for parents
To claim these tax breaks, the IRS must be able to verify your dependent's identity. For this reason, it's important to take several financial steps after the birth of your baby, including making sure they have a Social Security number, an Adoption Taxpayer Identification Number or an Individual Tax Identification Number before you file your taxes.
The bottom line
Raising children involves significant costs, but there are tax breaks that may help relieve some of the financial strain. To maximize the tax benefits of having a child, however, you'll need to keep detailed records and ensure you meet eligibility requirements. In some situations, consulting a tax specialist may help you match these benefits to your situation. By staying informed, you can effectively manage the costs of having a child and enjoy the rewards of family life.
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Nerre Shuriah
JD, LLM, CM&AA, CBEC® | Senior Director of Wealth Planning and Knowledge
