There’s a lot to be said about having children; they’re a joy, they’re a handful — and they’re expensive.
How expensive depends upon where you live and how much you earn. The U.S. Department of Agriculture estimates it costs between $180,000 and $540,000 to raise a child from birth to age 18, and those numbers just get you through high school — they don’t include college or technical school.
Fortunately, the federal tax code contains some help for parents in the form of deductions and credits.
Some parents lovingly refer to their children as their little tax deductions because each of your children entitles you to an exemption of $3,950. An exemption is an amount of money that you can subtract from your adjusted gross income (AGI), meaning you won’t be taxed on that portion of your income. For example, if your AGI is $40,000 after your personal exemption, and you have one child, your taxable income goes down to $36,050.
The good news for new parents is that you get to take the exemption for your new bundle of joy on this year’s tax return regardless of when your baby was born last year. That includes 11:59 p.m. on Dec. 31.
Child Tax Credit
This credit can further reduce your tax bill by $1,000 per qualifying child. Unlike exemptions, which only lower your taxable income, tax credits reduce the amount of tax you owe on a dollar-for-dollar basis. That means if you owe $3,000 in taxes, but you have two children, two-thirds of your tax bill will be eliminated.
The child tax credit has some rules and limitations you should be aware of, starting with the fact that it is nonrefundable. That means it can’t reduce your tax bill to less than zero. Other rules include:
Qualification: A qualifying child is a dependent who meets the following requirements:
- Age: Qualifying children must be under the age of 17.
- Relationship: The child must be one of the following: son, daughter, stepchild, foster child, brother, sister, stepsibling, grandchild, niece, nephew, or adopted.
- Support: You must have provided more than half of the support for the child.
- Citizenship: The child must be a U.S. citizen, U.S. national, or resident alien.
- Residence: The child must have lived with you for more than half the year, with the exception of children who were born or died at any time in 2014.
- Income: The credit phases out when your household income exceeds the credit limits. For married couples filing jointly, the phase-out starts at $110,000 in modified adjusted gross income. The phase-out for those who file single or head of household is $75,000. The credit is reduced by $50 for each $1,000 of income that is over the threshold.
Child and Dependent Care Credit
You can claim this credit if you paid someone to care for your child or children under the age of 13 while you worked or looked for work.
The credit is worth up to 35% of qualifying child care expenses of up to $3,000 for one child and $6,000 for two or more children (meaning the maximum credit is $1,050 for one child and $2,100 for two or more children). Like the child tax credit, this is nonrefundable. The credit can’t be used for private-school expenses, including private kindergarten.
Earned Income Tax Credit
This credit is available to parents with qualifying dependent children, subject to the following income limits:
- Single or head of household with one child: $38,511
- Single or head of household with two children: $43,756
- Single or head of household with three or more children: $46,997
- Married filing jointly with one child: $43,941
- Married filing jointly, with two children: $49,186
- Married filing jointly with three or more children: $52,427
This credit is fully refundable, which means if you qualify, you will receive the credit even if your tax owed is zero. The amount of the credit ranges from $3,305 up to $6,143.
This nonrefundable credit is intended to help defray up to $13,190 of qualified adoption expenses per child. The credit is not available for those who receive employer-provided adoption assistance. Qualifying expenses include:
- Reasonable and necessary adoption fees
- Court costs and attorney fees
- Travel expenses
- Other expenses directly related to the legal adoption of an eligible child