Parenting is Tough Enough. You Deserve Some (Tax) Credit for It!

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Raising children is a job in itself and nobody knows this better than parents. But having children does not mean only spend, spend, spend. No wonder it comes as a deserved relief when Uncle Sam is willing to pay something back for your effort. Make sure you are not only a loving parent, but a well-informed one too. Read on to find out about your options for decreasing your taxes if you have children.

The government prepared some tax exemptions and credits for all the parents out there. Taxpayers are allowed to claim fairly high exemptions for children - $3,650 for each child (in 2019 the amount will be slightly raised to $3,700). If the parents are not living together anymore, the exemption normally goes to the parent with primary custody. If the parents have an agreement stating that the non-custodial parent will claim the exemption for one or several children, he or she has to file a copy of Form 8332 (Release / Revocation of Release of Claim to Exemption for Child by Custodial Parent). That’s right, the copy has to be signed by the custodial parent.

So What Credits are Out There for Parents?

An important tax credit that can be worth up to $1,000 per child, depending on your income, is The Child Tax Credit. Check the conditions below to find out if you qualify.

The child has to be 17 years old or younger. He or she has to be your son, daughter, stepchild, foster child, sister, brother, stepsister, stepbrother, or a descendant of any of these, for example a grandchild, niece or nephew. Legally adopted children are considered as your own children.

There are some additional conditions for claiming the Child Tax Credit. The child has to be claimed by you as a dependent on your federal tax return, he or she has to be a U.S. citizen, national or resident alien and he or she has to have lived with you for at least half of the year 2019 (there are some exceptions to this last rule which can be found on the IRS website). One last thing. To qualify for this credit, the child must not have provided more than half of its own support in the respective tax-year.

What else should you know? The credit is limited if your AGI (adjusted gross income) goes above certain limits, depending on your filing status. If you’re married filing jointly, the phase-out begins at $110,000. If you’re married but file separately, the limit is $55,000. For any other filing status, the phase-out starts at $75,000.

If your AGI goes beyond these limits, your credit will be decreased by $50 for every $1,000 of excess income. One other important detail is that this credit is nonrefundable, meaning that if its value is higher than your tax liability, you will not get a check from the IRS for the difference. There is an exception though. In some cases, you may claim the Additional Child Tax Credit to get a refund if the credit exceeds your tax liability. We recommend getting expert advice to find out if you qualify for the Additional Child Tax Credit, as the criteria are rather complicated.

To claim the Child Tax Credit, you have to file Form 1040, 1040A or 1040NR. You cannot claim this credit on Form 1040EZ or 1040NR-EZ. You have to provide each of your dependent children’s names and tax id numbers (usually the same as the social security number).

One last thing about the Child Tax Credit. It is important to know that claiming this credit will not affect the exemption deductions that you take for your dependent children ($3,650 for each child in 2019). You can take both without any problem.

Another tax benefit related to children that you should know about is the Child and Dependent Care Credit. The first thing to address is whether you can claim both the Child Tax Credit and Child and Dependent Credit. The answer is yes, if you qualify for both credits you can claim both on the same return.

The Child and Dependent Care Tax Credit is a tax relief credit of 20% to 35% of eligible expenditures. The expenditures have to have been made for your child under the age of 13, but this credit is not only for dependent children. It can also apply to your spouse or certain other individuals who are physically or mentally incapable of self-care.

To qualify for this credit, you have to have made the expenditures while working or looking for work (the same conditions apply to your spouse also, if you are married and file together).

The dependent for whom you claim the credit has to have lived with you for at least half of the year 2019, and you must file as either single, married filing jointly, head of household or qualifying widow(er) with a dependent child.

Eligible expenditures go up to $3,000 for one child and $6,000 if you have at least two children. If your employer provides you with any dependent care benefits that you use to decrease your taxable income, you have to also deduct those benefits from the Child and Dependent Care Credit eligible expenditures.

If your family’s taxable income is not higher than $15,000 you could claim the full 35% credit. If your income is higher, for every $2,000 of excess income the credit lowers by 1%. That means that if your income is over $43,000 you’ll only be able to claim the minimum 20% credit.

If your family has an income between $75,000 and $200,000, you will benefit most from this credit.

Like the Child Tax Credit, the Child and Dependent Care Credit is also non-refundable. That means that if it is higher than your tax liability, you will not get a refund. To claim this credit, you must file Form 2441 with Form 1040 or 1040A.

If you have kids (“dependent children”, to use the IRS lingo) in college, we don’t have to tell you about what education can cost; you already know. You should however be aware of the Tuition and Fees Deduction (Form 8917), which can help you save on education expenses. You can only deduct enrollment and tuition fees (so no books, accommodation, food or transportation expenditures), up to $4,000 per family.

To qualify for this deduction, your MAGI (modified adjusted gross income) must be under the $80,000 limit (or, if married filing jointly, $160,000) and you must not be dependent of another person yourself. Also, if you already applied for a different learning credit, you cannot claim this deduction.

If you want to claim the Tuition and Fees Deduction, it’s best to keep in mind that you will not be able to claim any of the other education related credits for the same student – The American Opportunity Credit (former Hope credit) and The Lifetime Learning Credit. So you should check which one of these is the most beneficial for you before picking one.