It’s been said that a parent is someone who carries pictures of their children where their money used to be. It’s no joke that children are expensive, but at least there are some tax benefits that come with having children.
The most well-known, and the most generous, tax benefit is the Child Tax Credit. This can be claimed for dependent children age 16 or younger. This credit went through some changes during the Covid pandemic, but it has reverted back to being worth up to $2000 per qualifying child. The first requirement for this credit is the child must properly be claimed as a dependent on the tax return. The rules for claiming dependents can be found here. Additionally, the child must have lived with the taxpayer for more than 6 months during the year and must not contribute more than half of their own financial upkeep. The Child Tax Credit is refundable, meaning that if the credit is more than the tax due, the taxpayer may be eligible for a refund for some or all of the difference, depending upon income.
Another valuable tax benefit related to children is the Child and Dependent Care Credit. This credit is available to taxpayers who pay childcare expenses for their qualifying children under the age of 13. The credit is worth 20% - 35% of qualifying expenses paid to eligible caregivers, up to $3000 for one child and $6000 total for 2 or more children. Taxpayers claiming this credit should be aware of the rules governing what types of care expenses count, what filing statuses can claim the credit, and income limits for taxpayers claiming this benefit. Expenses paid through workplace FSA accounts cannot be used to get this credit. This is a nonrefundable credit, meaning it can reduce taxes owed to zero but no excess will be refunded.
There are other ways children can have a positive impact on a taxpayer’s bottom line, including qualifying a single parent for the Head of Household status, being a factor in determining if the taxpayer qualifies for the Earned Income Credit , and possibly qualifying as an Other Dependent once they become too old to be a Qualifying Child.
Complicated rules govern all of these child-related tax issues, and this article cannot cover all of the complexities that come into play, especially if the child does not live with both of their married-to-each-other parents. Each taxpayer has unique circumstances, and we are happy to discuss yours so you can hopefully keep a little money in your wallet alongside your kids’ pictures.
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