It’s no secret that kids are expensive. It costs an average of $233,610 to raise a child, and that doesn’t include paying for college. As such, it pays to do everything within your power to eke out as much financial savings as possible, and a good way to do so is to take advantage of the right tax credits.
If you’re not familiar with tax credits, they serve the important purpose of directly reducing your tax liability. Tax deductions, by contrast, exempt a portion of your income from taxes, but they don’t lower your liability on a dollar-for-dollar basis as credits do. If you owe the IRS $2,000 but then apply a $2,000 tax credit, your tax debt is knocked down to $0. And some credits will even pay you back, which we’ll discuss in a bit.
Now there are a host of tax credits you may find yourself eligible for. But if you have children, here are three, in particular, to focus on.
1. The Earned Income Tax Credit
You don’t need to have kids to qualify for the Earned Income Tax Credit or EITC, but having children increases your chances of eligibility, and also raises the value of what the credit is worth. The EITC is designed for low-income households. To qualify, your tax-filing status must be either single, married filing jointly, head of household, or qualifying widow, and you can’t have investment income over $3,600.
Beyond that, here are the criteria for qualifying for the 2019 tax year based on the number of children you have:
|Tax Filing Status||No Qualifying Children||1 Qualifying Child||2 Qualifying Children||3 or More Qualifying Children|
|Single, head of household, or widowed||$15,570||$41,094||$46,703||$50,162|
|Married filing jointly||$21,370||$46,884||$52,493||$55,952|
Meanwhile, here’s what the EITC could be worth to you:
- Up to $6,557 if you have three or more children.
- Up to $5,828 if you have two or more children.
- Up to $3,526 if you have one child or more.
- Up to $529 with no qualifying children.
Another thing: The EITC is one of the few tax credits that are actually fully refundable. Imagine you have a $0 tax liability but are eligible for $6,557 back thanks to the EITC. That’s money the IRS will send you.
2. The Child Tax Credit
The tricky thing about the EITC is that you need to earn a relatively low income to qualify for it. Not so with the Child Tax Credit. Here, you’ll get up to $2,000 per child under the age of 17 in your household, up to $1,400 of which is refundable.
You’re eligible for the Child Tax Credit in full as long as your income doesn’t exceed $200,000 and your filing status is single, head of household, or married filing separately. If you’re married filing jointly, that threshold increases to $400,000.
The Child Tax Credit phases out completely for single filers, heads of household, and married couples filing separately with an income beyond $240,000, or an income above $440,000 for married couples. And remember, the Child Tax Credit is based on how old your child was last year (since you’re filing your 2019 return this season), so as long as your child wasn’t yet 17 as of Dec. 31, 2019, you’re good to count him or her for this credit.
3. The Child and Dependent Care Credit
If you pay for child care so you can hold down a job, you may get some relief via the Child and Dependent Care Credit. Though this credit is nonrefundable, it’s available to you as long as you racked up eligible child care bills and have a tax-filing status that isn’t married filing separately.
Now calculating the value of this credit is a bit confusing, but it’s worth between 20% and 35% of up to $3,000 in child care costs for a single child under the age of 13, or up to $6,000 in child care costs for two or more children under 13.
Why the 20% to 35% range? You get to deduct a larger percentage of your child care costs if your income is lower. Anyone with an income of $15,000 or less can claim the full 35% of up to $3,000 or $6,000 in child care expenses. But that percentage declines as your income goes up, and once your income is $43,000 or higher, you’re limited to 20% of your costs.
Here’s how the credit could work for you in theory. Say you paid $10,000 in child care costs for a 10-year-old and an eight-year-old last year, and your annual income is $60,000. At that point, you’d be eligible to deduct 20% of up to $6,000 in expenses (even though your total bill for the year was higher), leaving you with a credit of $1,200.
Know your tax breaks
Grappling with the costs of raising children is difficult in its own right, so it pays to get as much tax relief as you’re entitled to. Be sure to read up on the various credits you may be eligible to claim this year so you lower your taxes and put more money back in your pocket.
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