7 Tax Credits for Parents

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tax credits for parentsTax season is coming!  We’ve gotten most of our W-2s/1099s in the mail, and it’s time to get down to business.  I’m not particularly looking forward to calculating everything new with health insurance.  It’s putting a cloud over my normally exuberant tax filing parade.

Once we get over all the changes to the tax code thanks to the Affordable Care Act, it will be time to celebrate!  Why?  Because we’re parents, and parents get a ton of tax breaks that can results in returns.  Sometimes very bountiful returns.  So all you parents, come join our party!

Credits that Can Reduce How Much Tax You Owe

There are two types of credits.  The first is the kind that can actually reduce how much tax you owe.

Credit for Child and Dependent Care Expenses

Do you pay for childcare expenses?  I hear they’re horrendous, but this is the one time of year you may be glad for them.  For each child, you can deduct up to $2,100 in 2014. This number is going to vary depending on how many kids you have in childcare and how much you spend on it throughout the year.  The credit goes on line 49 of your 1040, and you can figure out your exact numbers by filling out form 2441.

Child Tax Credit

The child tax credit is amazing.  If you have kids that live with you and are your dependents, you can get up to a $1,000 reduction on  your taxes for each child.  Have 3 kids?  That’s up to a $3,000 reduction.  The amount is going to vary depending on your income, but it’s well worth taking the time to figure out.  It’s line 52 on your 1040, and the info you’ll need to figure it out is under “Line 52” in the 1040 instructions.  Remember this one for later.  It’s going to be important.

Qualified Adoption Expenses

If you adopted in 2014 or have paid qualified expenses towards adoption, you can use them not only to possibly reduce your tax, but also your income on line 7 of your 1040, which would result in a lower modified adjusted gross income (MAGI.)  This could benefit you with all those complicated ACA taxes, FAFSA applications, and more.  You can deduct up to $13,190 of qualified expenses in 2014 per child.  If your child is special needs, you can deduct $13,190 even if you didn’t spend that much.  There are a lot of benefits, and a lot of variables, but suffice it to say it’s worth hashing out.  You can use form 8839 to do so.

College Credits and Deductions

If you’re paying for your child to attend college, you’ll either receive a 1098-T in the mail or print it out from the school’s website.  There are so many ways to apply these expenses to lower your taxes.  You can’t double (or triple) dip, so research each one and decide which is best for your bottom line.  Here are some quick highlights of the biggest benefits of each one, but you need to research and match them up with your own situation:

  • Tuition and Fees Reduction-Line 34 of your 1040:  The major benefits of this one are that you can reduce a greater amount, and it will lower your MAGI.  See the Qualified Adoption Expenses for why this is important.
  • Lifetime Learning Credit-Form 8863:  You don’t have to have a kid.  It doesn’t have to be your child in school.  You can use the credit for courses you’ve taken at a post-secondary school to improve your career.  Or you can use it for your kids’ traditional college education.
  • The American Opportunity Credit:  You can deduct $500 more if you use this over the Lifetime Learning credit if you are in your first four years of school.  But the biggest part of this one is that it’s 40% refundable, meaning you can get up to $1,000 back in your bank account depending on all of your other numbers, and if your tax rate is down to $0.

Credits That Will Make Your Refund Fat

The American Opportunity Credit brings us into the next type of tax credit:  refundable credits.  If your tax rate is $0, these credits will get a refund check mailed your way.  (Or direct deposited for those of you who prefer to live in the twenty-first century.)  The first is the American Opportunity credit for parents paying for college expenses as we discussed above.  And the second is…

The Additional Child Tax Credit

Yes!  You get another one!  Let’s say you owed $0 in taxes, but you have 3 kids.  Depending on your income, you can get $1,000 back per child, so $3,000.  Back in your pocket.  For real. Now, if you used part of your first Child Tax Credit to get that tax rate down to zero, you’ll only get the portion that’s left over.  So let’s say your original tax due was $200, but the child tax credit got it to zero.  You have three kids, so you have $2,800 that you could possibly get refunded to you.  There’s a lot of factors that go into determining your final number, but you can figure it all out pretty simply by filling out Schedule 8812.

You can even come up with your own methods of receiving tax deductions, should you be inspired to do so. For starters, you could donate some of your children’s old clothing to charity and receive deductions in return. This also applies to larger items that you might not have time for since starting your family, such as a boat. Making a boat donation is a simple way to earn tax credit because the charity sells the boat at auction and then provides you with a tax receipt in the amount for which it sold.

Happy tax season, everyone!  Please remember that I’m not a tax professional.  Just a tax enthusiast who has used a number of these credits before.  Research each of these and work out your own numbers before you apply them, and if you find yourself confused or stuck, get some help.  From a tax professional.

14 thoughts on “7 Tax Credits for Parents

  1. No Nonsense Landlord

    I see a lot of talk about all of the tax credits for kids. Even more lately.

    I wonder if I can make money adopting a child, and immediately sending him off to boarding school. If the tax credits ever run out so I make then than it costs, I can always give him back up for adoption.

    just an idea…

    1. femmefrugality Post author

      I’ve got to take up the argumentative, but I’m guessing the expectations were nothing less when this comment was made.

      First of all, in the defense of adoptive parents and the children who want them everywhere, this is one tax credit we should be able to get behind. It takes a heart of gold to go through the heavy expenses, both financial and emotional, of adopting. If an about ~13k reduction on your income is what you’re looking for, it’s a very short sighted financial plan. And unless the child is disabled, you can only deduct what you spend.

      Otherwise you’re getting these reductions/refunds for two reasons. Either you’re paying for an inflated education of a young person in a country in need of a largely educated populous, or you’re making the right amount for a $1k deduction/refund to be a big deal as you’re raising the next generation. I take more umbridge with the tax breaks for the ridiculously wealthy part of our population than the portion that goes to those who are investing a good portion of their life and budget into children.

  2. Mel

    Ugh. Maybe I should just start having children to actually get a tax refund? That’s a totally legit reason to have them, right? 😛

    1. femmefrugality Post author

      No that’s a really bad idea. It’s the only time all year that they’re good for your budget, and it doesn’t come close to fully compensating.

  3. Angela Gilmore

    Every year i think I’m going to get a big fat tax refund, and it has yet to happen. This is the first year I filed jointly and it’s a good thing I did or I’d have owed money! That’s the worst. These are great tips!

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