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5 Tax Credits for Families With Children
Raising children can be a costly endeavor, even if it’s an incredibly rewarding one. In fact, the U.S. Department of Agriculture (USDA) estimates that it costs nearly a quarter of a million dollars to raise a child from birth to adulthood.
Thankfully, families with children can qualify for additional tax credits to help reduce the high cost of raising kids. Not only do tax credits reduce the amount of money you pay in taxes, but these credits can sometimes help you get larger tax refunds.
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So, if you’re a parent or guardian to at least one child or dependent, here are five tax credits you and your family may qualify for.
1. The Child and Dependent Care Tax Credit
Do you pay for childcare in the form of a daycare, babysitter, nanny, or preschool? If so, you may qualify for a child and dependent tax credit.
There are specific qualifications your family must meet to claim this credit. First, your child must be younger than 13 years of age, unless they have a physical or mental impairment that leaves them incapable of taking care of themselves
Secondly, the expenses you incur must qualify for the tax credit. Here are some examples of childcare expenses that may qualify for the child and dependent care tax credit:
- Payments made to educational programs, such as preschool, that are below kindergarten level
- Care for before and after school
- Daytime summer camps
- Transportation costs related to transporting your child or dependent to and from where care is provided
Depending on your annual income, you could receive a maximum of an $8,000 tax credit per child in the 2021 tax season toward qualifying care-related expenses.
2. Child Tax Credit (CTC)
The Child Tax Credit (TSC) provides substantial tax benefits to parents each year. While the amount this credit provides varies by year, there are a few simple qualifications.
To qualify for CTC, you must have a child under the age of 17 and have a modified adjusted income of up to $75,000 ($150,000 for married couples filing jointly). Families that earn more than this amount may still qualify for the Child Tax Credit, but at a reduced amount.
In 2021, the Child Tax Credit was increased to $3,000 for children ages 6 to 17 and $3,600 for children younger than 6.
Additional CTC requirements include the following:
- The child has a valid Social Security number (SSN)
- The child is your son, daughter, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them (such as a grandchild) and has lived with you for a minimum of six months
- An adopted child is always treated the same as a biological child
- You provide more than half of the financial support the child needs, including expenses towards education, housing, food, and clothing
3. Earned Income Tax Credit (EITC)
The Earned Income Tax Credit (EITC) helps lift low-income families out of poverty and reward work participation.
The EITC amount you may qualify for depends on your income, filing status, and the number of children you have. While families without children can qualify for the Earned Income Tax Credit, families with children typically receive much higher tax credit amounts.
The Earned Income Tax Credit is income-based, but not all types of income are considered when qualifying for EITC. For example, unemployment income, child support, and alimony amounts are not considered.
For a child to qualify for the Earned Income Tax Credit, they must:
- Possess a valid Social Security Number
- Not be claimed as a dependent of another person
- Be under the age of 19, unless they are enrolled in full-time college. If they are, the child must be under the age of 24
- Be your son, daughter, brother, sister, stepbrother, stepsister, or a descendant of any of them (such as a grandchild) and has lived with you for a minimum of six months
- An adopted child is always treated the same as a biological child
- Foster children may qualify only if they are placed with you by:
- A state or local government agency
- An Indian tribal government
- A tax-exempt organization licensed by a state or an Indian tribal government
- A court order
- Have lived with you for at least half of the year
For 2021, the maximum Earned Income Tax Credit was increased to $6,728.
4. The American Opportunity Tax Credit (AOTC)
Do you pay for your child’s college education and related expenses? If so, you may qualify for an education tax credit called the American Opportunity Tax Credit (AOTC).
This credit provides parents with a tax credit of up to $2,500 per qualifying child if you pay for the course materials, tuition, or other related fees for your child’s education. However, if you do not owe any taxes, you can only receive a refund of up to $1,000 for AOTC.
So long as you continue to pay for your child’s education, you may be able to claim the AOTC for up to the first four years of your child’s education. To receive the American Opportunity Tax Credit, you’ll need to obtain and complete Form 1098-T from a qualifying educational institution, such as a trade school, university, or college.
Additionally, your modified adjusted gross income (MAGI) cannot exceed $80,000 if you are single or married filing separately, or $160,000 if married and filing jointly. Should your income exceed these limits, you may either receive a reduced credit amount, or you will not be able to receive the AOTC.
5. Tax Credits for 529 State Tax Plans
Are you saving money to help pay for your child’s future college expenses? Parents who use a 529 state plan account to save for future education expenses may qualify for an additional tax credit. While 529 state plans are managed by state agencies, every state has at least one plan available to parents.
There are two types of 529 state tax plans:
- Prepaid tuition plan
- Education savings plan
With a prepaid tuition plan, you’re able to purchase credits at chosen universities and colleges that go toward your child’s future attendance. Education savings plans work similarly but include tuition toward multiple types of institutions, like trade schools, elementary school, secondary school, and college.
While every state has a 529 plan, not every plan has tax advantages. In fact, these plans do not directly provide deductions on federal income tax returns. However, most states offer at least some form of deduction for state taxes.
Additionally, the returns that are earned on your contributions to qualifying education expenses are not subject to federal income taxes as long as the 529 plan funds are not withdrawn or used for non-qualifying education purposes. Should these funds be used on other expenses, the fund’s earnings may be subject to taxes, including an additional tax penalty of 10%.
