As any parent knows, raising kids can be extremely expensive. The good news is, most parents are able to get a little bit of help in the form of tax breaks. In fact, parents may be able to qualify for numerous credits. These can be very valuable, as credits reduce your tax bill on a dollar-for-dollar basis and can sometimes even result in a tax refund in excess of the amount you paid in.
While life can get harried when you're taking care of kids, it's important to take the time to learn about some of the tax breaks available to you. In particular, you should see if you can qualify for these three credits that can save you a fortune on your tax bill.
Image source: Getty Images.
1. The child tax credit
If you have kids who were under 17 for the entire 2019 tax year, you may be entitled to claim up to a $2,000 child tax credit for each qualifying child.
This credit is partially refundable, which means part of it can be claimed even if you didn't pay in enough to cover the entire cost of your credit. Up to $1,400 of the credit is refundable, so if you had $0 in federal tax liability, you could still get this money.
There's an income cap on claiming this credit, though. For couples who file as married filing jointly, the credit begins to phase out once your income hits $400,000 and the entire credit disappears once your adjusted gross income is $440,000 or higher. For all other filing statuses, the credit begins to phase out at $200,000 and disappears at $240,000.
2. The child and dependent care tax credit
If you have earned income, and your spouse does too if you're married, you may be able to qualify for this credit to help you defray the cost of child care for kids under 13 or who are disabled. You can get a credit for between 20% to 35% of the cost of what you spent on care, up to a maximum of $3,000 in qualifying expenses for one child or $6,000 for two or more children.
This can be day care, a nanny, or other care you pay for as long as it's not provided by another of your dependents. You can't double-dip, though, and claim a credit for funds you put into a workplace flexible spending account to help you cover care.
The percentage value you can claim varies depending on your AGI, with only taxpayers with $15,000 or less qualifying for the full 35%. For each $2,000 in additional AGI, the percentage you can claim drops by one, although there's a minimum of 20%.
3. Education tax credits
If you have kids in qualifying schools you're helping to pay for, education tax credits can also help you save on your tax bill. These include the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit.
The American Opportunity Tax Credit is available only if you're paying tuition for a student enrolled at least half time in a program offering an official credential such as a degree or certificate. The student can't already have completed more than four years of post-secondary education.
The American Opportunity Tax Credit is capped at 100% of the first $2,000 of qualifying expenses and 25% of the next $2,000 you pay in qualifying expenses, so it maxes out at $2,500. And it begins to phase out at $160,000 in income for joint filers or $80,000 for other filing statuses before disappearing entirely at $180,000 for joint filers or $90,000 for others.
The Lifetime Learning Credit, on the other hand, has more lax qualifying requirements as it can be claimed for any educational expenses even if the student isn't earning a credential and has more than four years of post-secondary education already. However, you'll receive a credit of just 20% of up to $10,000 in qualifying expenses, and the income limits are lower. Eligibility starts to phase out at $118,000 for joint filers and $59,000 for others. You can't claim the credit at all with an AGI exceeding $138,000 for joint filers or $69,000 for others.
Make sure you take advantage of all the tax credits you can
Tax credits are far more valuable than deductions. While deductions simply reduce the amount of taxable income you have, credits reduce actual taxes you owe. If you have a $5,000 tax bill and a $2,000 credit, you'd only have to pay $3,000 total to the IRS.
As a parent, you can't afford to leave any money on the table, especially when credits can have such a big effect on your take-home pay. Fortunately, now you know about these credits and can see which ones you can qualify for to reduce what you owe the IRS and increase the amount of your hard-earned money you can keep.
