It’s not a big secret that raising kids costs a lot of money. $233,610 to be exact...but who’s counting? If you’re a parent, then you know this firsthand. Luckily, the Internal Revenue Service (IRS) understands the expenses that come from parenthood. That’s why they created several tax credits and deductions just for families.
Below you will learn about several different deductions and credits, but first you should know the difference between the two. Both will help you reduce your tax liability, but not in the same way. Tax deductions are going to reduce the total income that is subject to income taxes. On the other hand, tax credits will reduce the amount you owe, dollar-for-dollar.
So, what kind of credits and deductions are available for families? Let’s take a closer look.
Expenses incurred while raising a child include items like food, clothing, and other basic necessities. Even though the IRS won’t allow you write these things off, they do provide a dependent exemption.
For each dependent you have, you are allowed to deduct $4,050 from your taxable income. Plus, if you had a baby in 2017, it doesn’t matter if it was January or December. As long as the birth was within 2017, you can claim the deduction.
Child tax credit
If you have children that are under the age of 17, you may be able to receive a $1,000 tax credit. That means if you have two kids, you will be able to lower your tax liability by $2,000.
There are income restrictions that will cause the credit to phase out. This happens when single filers earn $75,000 or more. Or if you’re filing jointly this will happen once you earn $110,000.
For many people, this credit will be nonrefundable. However, for some lower income filers you might be able to get a refund if the credit is greater than your tax liability. The formula for calculating this amount is fairly complex so it’s best to speak with a tax professional to see if you are eligible.
Earned income credit
Depending on your income and the number of children you have, you might qualify for the earned income credit. This was created so that lower-to-middle income families would be able to make ends meet.
In order to qualify, your adjustable gross income (AGI) must fall below the following amounts.
- $15,010 ($20,600 when filing jointly) for zero qualifying children
- $39,617 ($45,207 when filing jointly) for one qualifying child
- $45,007 ($50,597 when filing jointly) for two qualifying children
- $48,340 ($53,930 when filing jointly) for three or more qualifying children
Child and dependent care tax credit
If both you and your spouse are working parents, then you probably use some form of childcare. Depending on your location, this can be quite the expense each month. Luckily, you may qualify for a tax credit of 35 percent for the first $3,000 paid for one child or $6,000 when paying for two.
Just like other tax credits, the amount you can claim will decrease as your income goes up. For every $2,000 above an AGI of $15,000, the credit will be reduced by one percent until it reaches 20 percent.
If your family made the decision to adopt a child in 2017, you may be eligible for a tax credit of up to $13,570. If your AGI is greater than $203,540, the credit will begin to phase out. If your AGI was greater than $243,540 the credit won’t be applicable.
American Opportunity Credit
If you have a child in college, then you’re nearing the end of your financial responsibility. But now is probably also the most costly time for you. College expenses are increasing each year, but with the American Opportunity credit, you’ll receive a small reprieve.
You will receive a 100 percent credit on the first $2,000 paid toward qualified education expenses. For the next $2,000, you will receive a 25 percent credit per student, per year. Plus, up to $1,000 of this credit is refundable.
The American Opportunity credit will begin to phase out for anyone that has an AGI greater than $80,000 ($160,000 when filing jointly). You will no longer be eligible when above $90,000 ($180,000 when filing jointly).
When you hire a tax professional like ATBS, you will be able to rest easy knowing they are going to find every possible credit and deduction available to parents. So, give us a call at 866-920-2827 and we’d be happy to help you put more money in your pocket from your 2017 tax return!
This article was originally featured on ATBS.com.