How Your Kids Save You Taxes (Part 2)

/ BY / Personal Finance

Last week's article on taxes highlighted the three big ways that having kids can help you cut your tax bill: The dependent child exemption, the child tax credit and the child and dependent care credit.

Here’s a look at a few more ways that you may be able to save if you have children.

Educational costs: tax breaks and loan interest

Unless Congress acts to extend the program, this as the last year that you’ll be able to use the American Opportunity Tax Credit to get tax break on the tuition you pay for your children’s college. The program (formerly called the Hope Credit) expired at the end of 2012, but is still available for you to use when figuring your 2012 taxes.

The American Opportunity Tax Credit provides a tax credit of up to $2,500 per student that can be claimed for qualified post-secondary education after high school. A qualified school is any college, university, vocational school, or other post secondary educational institution that’s eligible to participate in a student aid program administered by the U.S. Department of Education.

Expenses you can include when calculating the credit include tuition, fees and the cost of required books and materials.

You can claim the tax credit if your adjusted gross income is under $90,000 if you’re a single taxpayer or head of household, or under $180,000 if you’re married and filing jointly. Your credit will be figured based on 100 percent of the first $2,000 of your expenses, plus 25 percent of the next $2,000.

The American Opportunity Tax Credit is limited to four years of post-secondary education, but there are no such limits on the Lifetime Learning Credit. Under the Lifetime Learning Credit, you can claim up to $2,000 per dependent child a year for qualified expenses for post-secondary education—same as the American Opportunity Tax Credit.

You may not, however, claim in the Lifetime Learning Credit in same year as you take the American Opportunity Tax Credit.

There are also income limits for the Lifetime Learning Credit: $62,000 for individuals, and $124,000 for joint returns.

The interest you pay on your children’s student loans may also be deductible. You can deduct up to $2,500 in interest that you paid in 2012 if your income is under $75,000 if you’re filing individually or $155,000 if you’re filing jointly.

Not sure which tax credit or deduction would be best for you? Check out the IRS’s Comparison Chart for Education Tax Benefits to compare programs and options.

Earned income tax credit

If you earned less than $50,270 in 2012, you may qualify for an earned income tax credit. The amount of your credit varies according to your income and the number of children you have; with three dependent kids, you might be eligible for a tax credit of as much as $5,891. The EITC is a refundable tax credit, which means that even if you did not pay any taxes you may be eligible to get money back from the government.

The IRS offers an EITC online assistant to help you figure out whether or not you qualify for this tax break.

Medical costs

When your children are small, there are times when it seems like you are constantly visiting the doctor for immunizations, checkups and sick visits. If 2012 was one of those years for you and your family, you’ll want to check to see if you’ve spent enough to deduct your medical expenses for the year.

Your health care costs do have to be pretty high; the medical expense deduction is available only if you itemize your income taxes and only if your spending on medical care is at least 7.5 percent of your adjusted gross income. (That percentage is going up to 10 percent for the 2013 tax year.) But you might qualify if you have several children and you, your spouse or your child has a serious, ongoing medical condition.

When calculating medical expenses, you can add in any costs for doctor fees, hospital expenses, medical appointments and tests, prescription drugs, eye care, eyeglasses and contact lenses, crutches, wheelchairs, hearing aids, and counseling and therapy services. You can also deduct any travel expenses to and from medical appointments.

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Please note your financial situation is unique and our tips & advice presented here may not be appropriate for your situation. CreditCardXpo.com recommends that you seek different advice & opinions from your own accountant or financial adviser who understands your individual circumstances before making any important decisions or implementing any financial strategy.