Raising a child is incredibly expensive, but it also opens up a world of new tax breaks that can help you hold onto more money for your family. Many of these parental benefits are in the form of tax credits, which reduce your total tax bill dollar-for-dollar, unlike tax deductions that only reduce your taxable income -- the base on which you're taxed. This is why tax credits are more valuable than deductions.
Each tax credit has certain requirements in order to claim it on your taxes without running afoul of the Internal Revenue Service (IRS), so you'll want to see which ones work for your family's tax situation. Here's a look at three of the most popular tax credits for parents.
1. Child Tax Credit
The Child Tax Credit is worth up to $2,000 per qualifying child for the 2018 tax year. A qualifying child is considered your biological, adopted, step, or foster child; a full, half, or step sibling; or the descendant of any of these individuals. He or she must be a U.S. citizen or resident alien who is under 17, listed as a dependent on your tax form, and has a valid Social Security number. He or she must live with you for at least half the year and cannot provide more than half of his or her own support.
This credit is phased out as income grows. High-income households won't receive the full $2,000 credit per child. Single filers, heads of household, and married couples filing separately who have an adjusted gross income (AGI) -- income minus certain tax deductions -- of more than $200,000 will see their Child Tax Credit reduced by $50 for every $1,000 they are over this threshold. The same goes for married couples filing jointly who have an AGI of more than $400,000. The Child Tax Credit disappears for people whose AGI is more than $40,000 over the limit for their tax filing status.
So how does this extra money show up? Currently, $1,400 of the Child Tax Credit is refundable, while the remaining $600 is nonrefundable. Nonrefundable tax credits can reduce your tax liability to zero but no further, while refundable tax credits can reduce your tax liability below zero by giving you the difference in cash. So if your tax bill was $1,000, and you have $2,000 in refundable tax credits, the government will give you an extra $1,000 as part of your refund.
2. Child and Dependent Care Tax Credit
You may qualify for the Child and Dependent Care Tax Credit if you're caring for a child under 13, and you pay someone to care for them so you can work. This credit also applies to a disabled spouse, parent, or other family member who can be considered a dependent you care for.
The Child and Dependent Care Tax Credit covers a percentage of dependent care expenses, up to $3,000 for one qualifying dependent, and up to $6,000 for two or more qualifying dependents. The value of the credit depends on your income. It ranges from 20% to 35% of the first $3,000 or $6,000 you spend on dependent care, and the percentage decreases as your income rises.
If you're married, both spouses must have earned income from a job in order to qualify for this tax credit. If you're divorced, you can only claim this credit if you're the custodial parent, and married couples filing separately cannot claim this credit at all.
For instance, if you have one dependent child and you qualify for a 30% Child and Dependent Care Tax Credit, your credit would be worth 30% of the first $3,000 you spent on childcare expenses throughout the year, or $900. If you only spent $2,000 on childcare, your credit would be worth 30% of $2,000, or $600. Check IRS Publication 503 to determine the amount of your potential credit.
The Child and Dependent Care Tax Credit is nonrefundable, so it can reduce your tax liability to zero, but the government won't refund you for any excess credit you qualify for.
3. American Opportunity Tax Credit
If you're helping your child pay for college, you may qualify for the American Opportunity Tax Credit. This covers 100% of the first $2,000 you spent on education-related expenses, like books and tuition, and 25% of the next $2,000, with the maximum credit being $2,500.
This credit only counts for education expenses, not for housing or transportation. Most of the American Opportunity Tax Credit is nonrefundable, but you can have up to 40% (up to $1,000) back if your tax credits exceed your tax liability for the year.
In order to qualify for the credit, you must claim your child as a dependent on your tax return, and he or she must be enrolled at least half-time for one academic period at a postsecondary institution. You can only claim the American Opportunity Tax Credit for the child's first four years of higher education, and only if he or she does not have any felony drug convictions.
To qualify, your AGI must be less than $80,000 if you're filing as single, head of household, or qualifying widow(er). Married couples filing jointly must have an AGI of less than $160,000 to qualify. Married couples filing separately are not eligible for the American Opportunity Tax Credit.
If your AGI is over these thresholds, you may qualify for a reduced credit, but single filers, heads of household, and qualifying widow(er)s with an AGI of $90,000 or more won't qualify for the credit at all. The same goes for married couples filing jointly with an AGI of $180,000 or more. You can determine how much the American Opportunity Tax Credit is worth for you by filling out Form 8863.
How to find more tax credits for parents
These are some of the most common tax credits available to parents, but they aren't the only ones. Your tax filing software or accountant should help you identify which you qualify for, but it doesn't hurt to do a little research on your own.
Keep in mind that the value of these tax credits and their qualification requirements may change from year to year, so check them every year before claiming them on your tax return.