There's nothing like the feeling of staring into your child's eyes and basking in the glory of having brought a beautiful little human into the world. But caring for your child also means subjecting yourself to sleepless nights, more diaper changes than you can count, and a great deal of financial strain. Between medical costs, food, clothing, and entertainment, the average cost of raising a child today is close to $250,000, and that doesn't even include the expense of college.
Thankfully, there are certain tax breaks that come with having children, so keep an eye out for these as you set out to prepare your upcoming return.
1. Exemptions for dependents
For those of you who think IRS policymakers are nothing but unsympathetic money-snatchers, this might warm your heart: You can claim your new baby as a dependent, which, for 2015, exempts $4,000 of your hard-earned money from taxation. For 2016, this number actually goes up to $4,050. Before you break out in a happy dance, keep in mind that the value of this exemption is phased out at certain income levels. For 2015 taxes, the limit is $258,250 for single parents and $309,000 for married couples filing jointly. For 2016, the limits are $259,400 and $311,300, respectively. Similarly, you can't claim an exemption if you're subject to the Alternative Minimum Tax.
2. Child Tax Credit
Here's another nice reward for having a child: Depending on your income, you may be able to claim a $1,000 tax credit every year until your child reaches age 17. Better yet, you can start claiming the credit the year your child is born, even if that doesn't happen until December. In other words, if you have a baby on Dec. 31, 2015, you can still snag that $1,000 for 2015.
A quick reminder on how credits work: Unlike deductions, credits lower your tax bill dollar for dollar. However, as is the case for claiming exemptions for dependents, there's a phase-out for the child tax credit at higher income levels, and it begins when your earnings exceed $75,000 if you're single or $110,000 if you're married and filing jointly. Furthermore, this credit is nonrefundable, so the most it can do is reduce your tax liability to zero.
3. Earned Income Tax Credit
The Earned Income Tax Credit (EITC) is a tax benefit for those with low to moderate income. Depending on how much you earn, for the 2015 tax year, you may be eligible for up to $3,359 with only one qualifying child. And the EITC is a fully refundable credit, which means that if it's more than large enough to reduce your tax liability to zero, then you'll receive any remaining credit money as a refund from the IRS.
4. Child and Dependent Care Credit
Need to pay for child care so you can work? You may be eligible to get some of that money back this tax season. With the Child and Dependent Care Credit, you can claim up to 35% of the cost of qualifying child care expenses (such as a day care center or summer camp) up to a maximum of $3,000 for one child under 13, or $6,000 for two or more children under 13. In other words, if you have an infant in day care and pay $5,000 per year, you can claim up to $1,050 (35% of the $3,000 maximum) as a tax credit depending on your income.
If you earn less than $15,000, you'll qualify for the full 35%. That percentage falls by 1% for every additional $2,000 of income you earn until it reaches 20% for an income of $43,000 or more. You must have earned income to qualify for the credit, and if you're married, you must file a joint tax return. Additionally, you must have paid a child care provider for the purpose of enabling you and your spouse to either work or look for work. If you're a stay-at-home parent who hired a part-time nanny to help with the kids, then you can't take the credit. Unlike some other credits, this one doesn't have an income limit. However, it is nonrefundable.
5. Adoption credit
Adoptive parents also get tax breaks for growing their families. Those who adopt can take advantage of the adoption credit, which for 2015 is worth up to $13,400 per child for qualified adoption expenses. As you might expect, there's an income-related phase-out for this credit as well, but at $201,010, it's higher than that of the child tax and child care credits. Though this credit was once refundable, that's no longer the case . However, any credit in excess of your tax liability can be carried forward for up to five years.
Of course, keeping track of all these tax breaks could prove challenging when you're juggling the dozens of daily tasks that come with raising children. But when you sit down to do your taxes this year, it pays to see whether you're eligible for any of them, because any amount of money can go a long way toward diapers, school supplies, and the ever-growing list of supplies you'll need to navigate the wild and crazy journey that is parenthood.