There’s no doubt about it; between diapers and daycare, taking care of a child is not a simple task and is certainly not easy on the wallet. Take into account the cost associated with student loans, and it’s true that children are just plain expensive.
Luckily, the government understands this and offers parents certain tax credits and breaks that they can take advantage of during tax season. For example, there are many educational tax breaks for those who incur expenses like tuition and required fees.
Some tax breaks offer parents the opportunity to reduce their taxable income on their tax returns, while others actually give them a tax refund if they meet certain criteria! These are called refundable tax credits and can offer parents a huge tax benefit!
In this article, we will focus on the tax credits that are most beneficial to parents, something that taxpayers who care for dependents can look forward to once a year if they meet certain qualifications. Most tax credits provide taxpayers with the opportunity to reduce the amount of tax they owe on their annual tax returns.
Some tax credits are limited in how often you can take them, while others are available nearly every year for qualified parents. Keep reading to learn more about the many tax breaks you can take as a parent.
Remember to enlist the help of a qualified tax professional when preparing your tax return if you plan to take a tax credit. Make sure you are prepared for your tax consultation, too. This way, you can ensure you get it done right the first time around.
What is a tax credit?
A tax credit is a dollar-for-dollar reduction in the amount of tax you owe the Internal Revenue Service (IRS). You can use tax credits on your annual tax return to reduce the amount of taxes that are due to the government. Some tax credits are refundable, meaning you will receive a tax refund if the amount of the credit is greater than your tax liability.
What is the difference between tax credits and deductions?
Tax credits reduce the amount of taxes you owe during tax time; tax deductions, on the other hand, reduce your taxable income, which may reduce the amount of federal tax you owe to the IRS.
Tax credits are more beneficial because there’s a chance you will receive a tax refund (if the credit is refundable); credits reduce the amount of tax you owe; deductions reduce the amount of taxable income that you have to pay taxes on.
What are the best tax credits for parents?
The Child Tax Credit
The Child Tax Credit worth up to $2,000 could lower your tax obligation quite significantly if you have more than one child. However, like many other tax credits, your child must meet certain qualifications, but it’s still worth it to take this tax credit if you are able, especially if you have multiple qualified children.
For this tax credit, the child must be under the age of 17 years old, be a legal dependent, as claimed on your annual tax return, be a United States citizen or a legal resident alien, and have lived with you more than half of the tax year.
Remember that the $2,000 credit is on a per-child basis, so if you have multiple children, you could receive a large amount with this tax credit. This number is accurate up through tax years 2018 to 2025.
During these years, the maximum refundable portion of this tax credit is $1,400. This amount is equal to 15% of the earned income above the $2,500. If you do not have any tax liability and your total earned income is at least $2,500, you may be able to claim the full amount of the refundable credit.
When calculating your income for the purposes of this tax credit, you must include any foreign income exclusions.
Also, along with this credit, there is the Additional Child Tax Credit that you may be eligible for.
The Child and Dependent Care Tax Credit
For the Child and Dependent Care Tax Credit, you can qualify if your child or dependent caused you to incur child care expenses and were under the age of 13 years old at the end of the tax year. The child care must have been required to allow you to either work or look for a job. Also, you and your spouse, if married, must have earned income during the tax year.
This tax credit is worth up to 35% off qualified expenses that you incur while looking for or going to work. The maximum credit amount is $3,000 per qualifying parent, so you may be allowed to take $6,000 if you are married.
To claim this credit, you will want to complete IRS Form 2441: Child and Dependent Care Expenses. Attach this form to IRS Form 1040 when completing your tax return.
The American Opportunity Tax Credit
The American Opportunity Tax Credit allows parents and students the opportunity to reduce the cost of going to college by saving money on education-related expenses. Qualified taxpayers can claim this partially refundable credit if they incur qualified education expenses, such as supplies, equipment, school fees, and tuition.
This credit is worth up to $2,500 if that much was paid by the parent or student for educational expenses during the year. To claim this tax credit, taxpayers need to use their Form 1098-T: Tuition Statement, which they should receive from all schools they attended.
To complete your tax form, just complete IRS Form 8863: Education Credits. Attach the form to your annual tax return.
The Adoption Tax Credit
The Adoption Tax Credit helps with the costs of adopting a child. Expenses covered by this tax credit include certain travel expenses, court and attorney fees, and dining expenses related to adopting a child. Those who adopt a child with special needs allows you the chance to claim the full amount of the Adoption Tax Credit.
It is a nonrefundable credit, so you will not be able to receive a refund if your tax liability exceeds the amount of the credit that you have earned.
What’s great about this tax credit is that you may be eligible to take adoption expenses up to $14,300. The maximum tax credit is adjusted each year for inflation. Also, taxpayers who qualify may exclude from their taxable income any qualified adoption expenses paid or reimbursed by an employer, up to the limit of this tax credit.
The IRS goes into more detail on the requirements related to this tax credit in IRS Publication 607: Adoption Credit and Adoption Assistance Programs. To claim the Adoption Tax Credit, you need to complete IRS Form 8839: Qualified Adoption Expenses, and attach that form to your annual tax return IRS Form 1040.
The Earned Income Tax Credit
The Earned Income Tax Credit (EITC) is a tax benefit for working taxpayers who have low to moderate-income levels. To qualify for this tax credit, you must meet certain requirements. You also must file an annual tax return, even if you do not owe any tax or are not technically required to file a tax credit.
This tax credit reduces the amount of tax you owe and could give you a refund if applicable if you are due one. This is a refundable tax credit, so it’s a very beneficial tax break to go for if you qualify for it.
The Lifetime Learning Tax Credit
The Lifetime Learning Credit (LLC) gives eligible taxpayers the opportunity to claim a tax credit of up to $2,000 on their annual tax return. Qualified taxpayers, spouses, or dependents can claim the credit if they incur qualified education expenses, such as tuition and/or related fees.
Who is eligible to take a tax credit?
Claiming dependents can be a tricky thing when it comes to tax returns. Of course, you’ll want to get the best tax benefits that you are allowed when tax season comes along. The IRS states that the custodial parent is generally the parent with whom the child lived with the longer period of time during the year.
Keep in mind that there are special rules that may allow the noncustodial parent to be treated as the custodial one. For example, if the custodial parent signs IRS Form 8332: Release and Revocation of Release of Claim to Exemption for Child by Custodial Parent, the noncustodial parent may be able to claim the child as a dependent for tax purposes.
When looking to take tax credits on your annual tax return, make sure you meet the requirements necessary to be eligible for these tax credits. For example, many times, your adjusted gross income must meet the guidelines presented by the IRS.
You want to make sure you meet all requirements so that you don’t take credits that you shouldn’t be taking, which could result in tax penalties.
Are you struggling to find the right filing status this year, as you look to doing your annual taxes? Are you hoping to claim head of household filing status but aren’t sure if you meet the requirements? We can help you with your tax situation or steer you in the right direction.
Our office is fully equipped to help with taxes, tax auditing, business consultations, and many other services. Please contact us today for a free consultation with a qualified tax accountant. You can trust Indiana’s tax expert!