Here's What Happens to Your Tax Refund When You Have Children

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  • Raising children can be very expensive, but there are several lucrative tax breaks available to help offset the costs.
  • The Child Tax Credit provides as much as $2,000 per year for every qualifying child.
  • There are also tax breaks for child care, college savings, and additional credits for lower-income taxpayers.

Any parent can tell you that raising a child isn't cheap. In fact, new parents can expect the cost of raising a single child to be between $15,438 and $17,375 annually as of 2022, according to the USDA. Fortunately, there are several lucrative tax breaks available to parents to help offset these costs, and they can potentially add thousands of dollars to your refund when you file taxes every year.

Child Tax Credit

The most common tax break for parents is the Child Tax Credit, which provides as much as $2,000 for every qualifying child you claim as a dependent on your tax return. Plus, as much as $1,500 of the credit is refundable, meaning you can get it even if you don't have any federal income tax liability for the year.

In order to claim the full credit, your modified adjusted gross income (MAGI) cannot be greater than $200,000 for the year ($400,000 if you file a joint tax return). If your income is greater than these thresholds, the credit is reduced by $50 for every $1,000 in income above the applicable limit. In addition to the income restriction, the child needs to meet certain criteria.

First, the child has to be under age 17 at the end of the year. For example, if your child turned 17 in November 2022, you can't claim the Child Tax Credit for them on the return you filed in 2023. They must be your child, stepchild, foster child, or another type of qualifying relative. And, they must have lived with you for more than half the year and provided no more than half of their own financial support.

Child and Dependent Care Credit

If your children are in daycare so you can work, there's an additional tax credit you may qualify for. The Child and Dependent Care Credit.

The amount of the credit depends on your income but is worth 20%-35% of as much as $3,000 in qualifying expenses for one dependent or $6,000 in expenses for two or more. So, the most you can get is $1,050 if you have one eligible dependent or $2,100 if you have two or more. And unlike the Child Tax Credit, this one is nonrefundable.

In order to qualify, the expenses must have been paid for care for a child under 13 or for a dependent who meets certain other criteria. Eligible expenses include (but are not necessarily limited to), preschool or nursery school, before- and after-school care programs, a private caregiver (such as a nanny), and summer day camp programs.

Finally, in order to claim the Child and Dependent Care Credit, you (and your spouse, if filing jointly) must work or be full-time students.

Earned Income Tax Credit (EITC)

Technically, the Earned Income Tax Credit, or EITC, isn't just a tax break for parents. But the credit can be far more lucrative for people with children. For example, in 2022 the credit was worth up to $560 for qualifying taxpayers with no children, or as much as $6,935 for parents.

The credit is refundable but is only available to low-to-moderate earners, and the income thresholds depend on your filing status and how many dependents you have. Just as one example, a married couple filing jointly with one child must have adjusted gross income (AGI) of $53,210 or less in 2023 to qualify for the credit.

College savings contributions

You can start contributing to a 529 Savings Plan to set aside money for your child's education as soon as they are born. While your 529 contributions won't do anything for your federal tax refund, these plans are administered by the states, and many states offer a deduction on your state tax return for contributing.

It's also worth mentioning that although they won't help new parents, there are some excellent tax credits that can help when you eventually pay tuition or other qualifying expenses for your children. For example, the American Opportunity Credit can reduce your tax bill (or increase your refund) by as much as $2,500 per year for as many as four years per child.

It costs a lot to raise a child

The bottom line is that there are several potentially lucrative tax breaks available for parents, and these could dramatically increase your tax refund. The Child Tax Credit alone could increase your tax refund by $2,000 every year, and if you have child care expenses or qualify for the EITC, your refund could increase even more.

However, it's important to realize that these are designed to offset the costs of raising a child. For millions of families in the United States, these tax breaks can provide some much-needed relief.

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