The average cost to raise a child to age 17 is a whopping $245,340 for a middle-income couple, according to the US Department of Agriculture. But thankfully during tax season, parents can get a bit of relief with some tax breaks. If you have kids, read on to get a breakdown of a few ways to put some cash back in your pocket.
Exemptions for dependents
When you file, you generally take personal exemptions for you and your spouse that reduces your taxable income by $4,050 per person. But if you have kids, you can reduce your taxes by that same amount for each dependent under the age of 19, or a student under the age of 24.
For a family of four, that means you reduce your total taxable income by $16,200 [$4,050 x 4 = $16,200.] To qualify for this deduction, the income cap for married couples filing jointly is $311,300. For single filers, the income cap is $259,400.
Child tax credit
Next, there’s the child tax credit. It reduces the amount of income tax you owe by up to $1,000 for every child living with you, under age 17. But it’s only for couples earning less than $110,000 a year. A reduced credit is available for incomes between $110,000 and $130,000. For single parents, the maximum you can earn is $75,000 to receive this credit. For those married filing separately, the maximum adjusted gross income is $55,000.
Additional child tax credit
Related to the child tax credit above is the additional tax credit for lower-income families. The child tax credit can only be deducted from what you already owe in taxes, but the additional child tax credit can be refunded to you.
For example, if you have one child and you owe $900 in taxes, what you owe will be deducted to zero – and then you could be eligible for the additional tax credit that refunds you the balance of $100.
Just note that the combination of these two credits – the child tax credit and the additional child tax credit – can never exceed $1,000 per child, says Barry S. Kleiman, principal CPA at Untracht Early. As an example, he says a married couple earning $60,000 jointly, with a taxable income of $30,000 and a tax liability of $4,500, could only receive $2,000 for their 2 kids in total ($1,000 per child). Because they can’t get more than $1,000 per child, they would not qualify for the additional child tax credit.
Earned Income Tax Credit
The Earned Income Tax Credit, or EITC is another tax credit for lower-income families. Here’s how it works: let’s say Mary is a single working parent making $30,000 a year to support herself and her son Tyler. According to the IRS site, she’s qualified to receive the EITC, as a single parent with one child. In her case, her credit of $1,500 is more than the $1,300 in what she owes in federal income taxes. So she gets the difference of $200 back in the form of a tax refund.
The max EITC allowed for single parents with 3 or more children who earned less than $47,955 in 2016 is $6,269. For married parents filing jointly, the income cap is $53,505. So check the IRS’s site to see if you qualify for this credit.
“These credits are not mutually exclusive and you may qualify for one, two or all three of them on your tax return,” says Kleiman. As an example of receiving all three, he says if we reduce Mary’s income to $20,000, it could result in her receiving a child tax credit of $261, an additional child tax credit of $739, and an EITC of $3,080.
Remember to be eligible for any of these deductions, both you and your children need Social Security numbers or individual taxpayer ID numbers at the time you file.
Check back next week for more tax breaks on childcare, tuition, college savings, and more.
Do you have a personal finance question? Email them to us at moneyquestions@yahoo.com
WATCH MORE
5 ways criminals will try to scam you this tax season
The most important rule when it comes to giving your kid allowance