Tax Breaks for Parents: a well deserved break from all your hard work!
Did you know? A study conducted by the U.S. Department of Agriculture projected that parents in the United States spend about $233,610 to raise a child born in 2015! The study was based on the cost of various living expenses, such as food, housing, transportation, health care, clothing, child care and education, and other miscellaneous costs. Each year the costs of raising children increase as inflation rises. Fortunately, there are some tax credits and benefits to help parents alleviate some of the financial burden.
Child Tax Credit
The most common tax credit is the Child Tax Credit. The credit is worth up to $2,000 per qualifying child or dependent who has a valid US Social Security number. Taxpayers qualify for the full amount if all eligibility factors are met and annual income is not more than $200,000 or $400,000 if filing a joint return. Taxpayers with higher incomes may still qualify, but the credit begins to phase out after the 200k income limit (or 400k if filing a joint return).
Want to know who qualifies as a dependent? Click here to determine who you can claim as a dependent.
Want to know if your dependent qualifies? Try the IRS’s Interactive Tax Assistant to check if you qualify for this credit.¹
Child and Dependent Care Credit
Did you incur any dependent care expenses while you went to school, worked, or looked for work? That can be a credit! Dependent care expenses such as daycare and day camp expenses (not including overnight camps) for dependents under the age of 13, or dependents of any age who are incapable of self-care and who live with you for more than half of the year, can qualify for this Federal credit.
Click here to find out if your dependent care expenses qualify for the Child and Dependent Care credit.¹
Earned Income Tax Credit (EITC)
The Earned Income Tax Credit (EITC) allows low- to moderate-income workers and families to get a tax break by reducing the taxes owed and potentially increasing your refund. The credit is based on various factors, such as your adjusted gross income (AGI), filing status, dependents, and more. The IRS provides an EITC Table to quickly check if you qualify for the credit.
Still unsure if you qualify for the credit? Try the EITC Qualification Assistant to find out if you qualify for this credit.¹
State Tax Dependent Credit
Many states offer dependent credits as well! For example, the state of Pennsylvania provides a Child and Dependent Care Enhancement Tax Credit similar to the Federal Child and Dependent Care Credit. California offers a Child and dependent care expenses credit and a Dependent parent credit.
Click here to find out what dependent credits your state offers; or look up your state’s Department of Revenue website to see current dependent credits or the full list of credits available to taxpayers!
Education Credits
You’ve probably heard this saying before, “It pays to go to school”. Federal and state regulations currently provide various tax credits and deductions for educational expenses. Here are some of the credits and deductions available to taxpayers:
American Opportunity Tax Credit (AOTC)
The AOTC is a refundable credit for qualified education expenses in the first four years of higher education. The maximum credit you can get is up to $2,500; with 40% of any remaining credit being refundable! In order to claim the credit, you or a qualified dependent must have received Form 1098-T, Tuition Statement, from an eligible educational institution, and must meet the income limits for AOTC.
Lifetime Learning Credit (LLC)
Used up the four years of AOTC credit but still enrolled in an eligible educational institution? The LLC credit can be used for undergraduate, graduate and professional degree courses! If you have qualified education expenses, the credit can be used to claim up to $2,000 (20% of the first $10,000 of qualified education expenses) in nonrefundable tax credits. The credit also has no limit on the number of years you can claim the credit. Click here to view the differences between the AOTC and LLC credits.
Not sure which credit to choose? Try the IRS’ interactive app to see if you qualify for an educational credit.
529 Plan Tax Deduction
Saving for college? Open a 529 plan! This college savings plan is sponsored by various U.S. states or state agencies. Although there are no Federal tax credits available, interest earned in the 529 account are tax-free; and distributions used to pay for tuition, books, and other qualified expenses are excludable from federal taxes.
Additionally, some U.S. states offer tax credits or deductions for the yearly contributions made to a qualified 529 plan. Not all plans qualify, so make sure to search for plans that are approved by your state to claim the credit/deduction. The Education Data Initiative provides an easy to view list of 529 tax deductions and plans by state.
Dependent Care Flexible Spending Account (FSA)
Does your work offer FSA benefits? Consider participating in a dependent care flexible spending plan. A percentage of your paycheck is pre-taxed and put into the FSA account. The account can then be used to pay for qualifying dependent care expenses! For 2023, the maximum annual contribution limit is $5,000 per household or $2,500 if married filing separately.
Interest on Student Loans
According to an article by Forbes, Americans owe a total of $1.75 trillion in student loan debt! Are you part of the $1.75 trillion and have paid interest on the loans? You may be able to deduct the lesser of $2,500 or the amount of interest actually paid. Remember to include Form 1098-E, Student Loan Interest Statement, when filing your income tax return for a potential tax deduction.