I have had many friends become parents in the past year. I guess it’s that phase of life for my generation. While we don’t have any children yet, I would think that parenting would be one of the most challenging and rewarding things in life. I know that children certainly present their share of financial challenges as well. The US Department of Agriculture recently estimated that it costs $226,920 to raise a child to age 18, and that doesn’t even consider if the kid wants to go to college. Fortunately, Uncle Sam has decided to help. There are several ways that having children will lower your tax bill. It won’t lower it enough to cover the costs of raising a child, but every little bit helps.
First, you can claim your children as dependents. There is a whole list of requirements to technically qualify as a dependent, but in general, if the child is under age 19 (or 24 and a full time student), a relative, and you provided more than half of their financial support, then they will qualify. This allows you to take a $3,700 exemption on your 2011 return. In a 15% tax bracket, that exemption is worth $555.
Children get their own tax credits. The child tax credit is worth up to $1,000 per qualifying child. A qualifying child must be claimed as a dependent and under the age of 17. The child must also be a US citizen or national. The credit is nonrefundable and slowly phases out for couples earning more than $110,000. There is a refundable credit called the additional child tax credit available for lower income taxpayers and is based on the amount of child tax credit used and the taxpayer’s income.
Also, if you adopted, there is an adoption credit available for up to $13,360 for adopting children under the age of 18 or for adopting a child with special needs. The credit depends on the amount of it costs to adopt the child. However, if you adopted a special needs child, you get the full credit regardless of the expenses incurred.
Since many parents still need to work after having children, Uncle Sam created the Child and Dependent Care Credit. You can take a tax credit for costs incurred for babysitters, after school programs and the like if those expenses allow you to continue working. The amount of the credit depends on the parent’s income, the amount of the expenses, and the number of children eligible. An eligible child must be a dependent under the age of 13.
I know some of that got a little technical, so thanks if you’re still with me. There are so many details and requirement that I did not address that I would encourage you to consult your CPA or do some additional research before you attempt to claim any of these credits or if you have any questions.
While there are some other ways your kids can give you tax benefits, the ones above are by far the most common and can easily save you several thousand dollars. I hope these ideas will help you save some taxes or at least help you to ask your CPA better questions when the time comes.