Tax Tips and Tax Credits

Tax Advantages for parents and more!   

There’s no doubting it: having kids is expensive. Between paying for diapers, daycare, and tons of other baby supplies, new parents can quickly find themselves overwhelmed financially. Fortunately, several tax advantages are available to parents to alleviate a little of the financial responsibility.

1. Child Tax Credit

As a parent, you can take advantage of the Child Tax Credit (CTC) on your tax return if you have a child under the age of 17 who you claim as a dependent. Under the current tax law, the CTC is worth up to $2,000 per qualifying child. The credit value is reduced by 5 percent of adjusted gross income over $200,00 for single parents and over $400,000 for married parents filing jointly.

The unique part of the CTC, however, is that it is partially refundable. That means if the credit value ends up exceeding the amount of taxes you owe, you can receive up to $1,400 of the remaining balance as a tax refund. That portion of the credit is otherwise known as the Additional Child Tax Credit (ACTC).

Additionally, parents can receive a nonrefundable CTC of up to $500 for each dependent between the ages of 17 and 18 as well as qualifying dependents who are full-time college students between the ages of 19 and 24.

2. Child and Dependent Care Credit

While the Child and Dependent Care Credit sounds awfully similar to the Child Tax Credit, they are two separate tax benefits available to parents. The Child and Dependent Care Credit is specifically designed to help reduce the burden of childcare costs incurred while you are working or looking for work.

The credit itself is worth 20-35% of qualified expenses. The amount you can qualify to claim depends on how much you spend on child and dependent care as well as your income level. The maximum amount of qualified expenses you’re allowed to claim is $3,000 per qualifying dependents or $6,000 for two or more qualifying dependents.

3. Adoption Tax Credit

If you adopted a child , you may be eligible for the federal adoption tax credit. This benefit can credit you up to $14,300 per child. It’s vital to note, however, that this tax credit is not refundable, which means you can only claim the credit if you have a federal tax bill.

This is a one-time credit per adopted child. Eligibility for the adoption tax credit depends on a few circumstances. First, in order to claim the credit, you need to have adopted a child (other than a stepchild) in the 2020 tax year. The child must be under the age of 18 or must be either physically or mentally unable to take care of him or herself.

Second, your income must fall within the income limits for the credit. Families with a modified adjusted gross income less than $214,520 can claim the full credit. Families with incomes between $214,520 and $254,520 can claim a partial credit. Any family whose income is above $254,520 cannot claim the credit.

4. Earned Income Tax Credit

For parents with lower incomes, the Earned Income Tax Credit (EITC) can be a game changer. It is a refundable tax credit that ranges from $9 to $7,430 for tax year 2023 and $632 to $7,830 for tax year 2024. The amount you qualify to receive is dependent upon your filing status, how many children you have, and your income level.

5. Make the most of a 529 plan

It’s never too early or too late to start saving for your child’s education. Fortunately, 529 plans offer tax and financial aid benefits when it comes to putting money away for your child’s college expenses.

There are two types of 529 plans: college savings plans and prepaid tuition plans. College savings plans work like a Roth 401(k) or Roth IRA by investing your after-tax contributions in mutual funds or similar investments. Prepaid tuition plans let you pre-pay all or part of the costs of an in-state public college education. They may also be converted for use at private and out-of-state colleges.

Like a Roth IRA, contributions to a 529 plan are made post-tax and are not deductible from federal income taxes. Funds in a 529 plan grow federal tax-free and will not be taxed when the money is withdrawn for qualified education expenses. Some states also offer state income tax incentives to parents, such as state income tax deductions and tax credits for contributions to the state’s 529 plan.

6. Consider a dependent care flexible spending account

Depending on the benefits offered through your employer, you may be eligible to participate in a dependent care flexible spending plan.

Dependent care FSA programs work much like a regular healthcare FSA in that you can have pre-tax dollars taken out of your paycheck and put into the account. These funds can be used to pay for qualifying dependent care expenses, such as daycare. In 2023 and 2024, you could contribute up to $5,000 in a dependent care FSA if single or married, filing jointly. ($2,500 if married, filing separate)

7. Adjust your tax withholding – 3 withholding tips

  1. Self employed people – you will owe 15.3% tax on your net profit in addition to federal tax based on tax bracket of all combined income – please pay estimated taxes OR if you also have a regular job, have extra withholding deducted on your W4 AND also complete line item 2 below or you will owe additional taxes on your return
  2. If you have more than one job (or are also self employed – OR your spouse also works), please check the box on Line 2 of the new W4 to have extra withholding taken out – Spouse should do this as well
  3. If you have children, and want to ensure you have enough extra withholding taken out for a possible larger refund – DO NOT complete line 3 regarding the number of children – leave that blank – the IRS will reduce your withholding by the number of children stated on this line

By adjusting your withholding, you can ensure you have the appropriate amount of taxes withheld from your paycheck so you, ideally, owe less when you file your tax return.     Click here to use the  Tax Withholding Estimator.

To adjust your withholding, submit a new Form W-4 to your employer.