According to a recent story in USA Today, it can cost families almost $250,000 to raise a child from birth until their 18th birthday. So if you're a parent, it's good to know that you're eligible for a bit of a break with child-related exemptions, deductions and credits on your federal taxes.
Deductions and exemptions reduce the amount of your taxable income. If your gross income is $50,000, your personal exemption of $3,800 will cut the amount on which you’ll pay taxes to $46,200. Deductions (for charity, for state taxes, for mortgage interest, etc.) work the same way.
A tax credit is an even better deal for you. A tax credit is subtracted directly from the amount of tax that you owe the government. If your federal tax bill is $3,500, a tax credit of $500 would reduce your liability to $3,000.
Here are three big tax breaks that can provide a little extra money in your pocket—cash that can help you take care of your kids.
Every dependent child that you can claim on your income tax entitles you to an exemption of $3,800. This exemption reduces the amount of your adjusted gross income.
ou can claim a dependent deduction for any child or stepchild (whether by blood or adoption), for a foster child, or for any siblings you are raising. If you’re raising a grandchild, a great-grandchild, a niece or a nephew—in other words, any descendant of one of these dependents—you can claim the dependent exemption for that child as well.
A child is considered your dependent if he/she is under the age of 19 at the end of the tax year, or under the age of 24 if a full-time student for at least five months a year. Any dependent you claim must have the same principal residence as you for more than half the year.
If you have a child who is permanently and totally disabled, no matter what the age, that child can also be claimed as a dependent on your tax form.
If your dependent children were under age 17 at the end of the 2012 tax year (December 31, 2012), you may be able to take advantage of the child tax credit. That’s worth $1,000 off your taxes for every qualified child.
Unlike the dependent exemption, however, the amount of the child tax credit you can get is dependent on your income. You’ll receive the full credit if your adjusted gross income is $75,000 if you file your taxes as a single person, $110,000 if you file jointly as a married couple or $55,000 if you’re married but you and your spouse file your taxes separately.
If the amount of your Child Tax Credit is greater than the amount of income tax you owe, you may be able to claim the Additional Child Tax Credit. This gets complicated, so it’s best to check out the IRS' Child Tax Credit form to see if your qualify.
Are your dependent children under age 13 in daycare while you and your spouse are at work or looking for work? Do you have a full-time nanny who works in your home to care for your children? Depending on your income, you can get a tax credit for 20 to 35 percent of the amount that you spend on child care. You can include in your calculations up to $3,000 of the child care expenses for one child, and up to $6,000 for two or more children.
The percentage that you can claim depends on your adjusted gross income, and it’s a sliding scale. At the low end, if you (and your spouse, if you are filing jointly) earn less than $15,000 a year, you can claim the maximum 35% of the child care payment; if your adjusted gross income is $43,000 or more, you’re limited to 20%.
Say you have two children, and you and your spouse have a combined gross income of $60,000 a year. You pay a total of $7,500 each year in child care expenses. Since the maximum claimable expense is $6,000 for two children, and since you earn more than $43,000 a year, you’re entitled to a child care tax credit of $1,200. (That’s 20% of 7,500.)
If you pay your child care expenses using a pre-tax, flexible spending account through your employer, you can’t count those payments when calculating the amount of your child care tax credit. But the flexible spending account has a $5,000 cap; any amount you spend beyond that cap can be used to in calculating your child care credit.
Take the previous example. Suppose you’ve paid $5,000 of your $7,500 child care expenses from your flexible spending account, meaning you’ve paid $2,500 out of pocket. Your child care tax credit would be $500 (20% of that $2,500).
Next week: More kid-related deductions and credits: education, loans and health insurance premiums.