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Tax Benefits of Parenthood

Lifestyle and Budget

As you scratch your head trying to figure out how your kids managed to fit two slices of cheese into your computer’s DVD slot and leave your keyboard crusty with chocolate sauce, take a deep breath and remember that you love your children. They provide you with love in return... as well as tax benefits. Some of the most popular of those parental tax benefits are listed below.

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Standard Exemption – Each dependent child that you claim drops your taxable income by $3,950 for tax year 2014 (on this year’s return) and $4,000 for the 2015 tax year (next year’s return).

Earned Income Credit (EIC) –The EIC is designed to help lower-income families and is scaled according to your income and the number of dependents you claim. The maximum available credit is $3,305 with one child and $6,143 for three or more. For details on income limits and qualifications, see IRS Publication 596, “Earned Income Credit (EIC).”

Education Credits – The American Opportunity Credit (AOC) and the Lifetime Learning Credit (LLC) apply to higher-education costs. You may only claim one, even if you qualify for both. 

The LLC allows up to $2,000 in credit per tax return with a modified adjusted gross income (MAGI) phase-out limit of $64,000 if single or $128,000 for married filing jointly. The AOC allows up to $2,500 in credit per eligible student and has phase-out MAGI limits of $90,000 single and $180,000 if married filing jointly. The LLC is all non-refundable, meaning you cannot receive any more in the credit than you paid in taxes, while the AOC is 40% refundable.

Child Tax Credit/Additional Child Tax Credit – You may be able to take a child tax credit of up to $1,000 per qualifying child if your MAGI is less than $75,000 if single, $110,000 if married filing jointly, and $55,000 if married filing separately. If you did not pay enough taxes to receive the full child tax credit, you may qualify for the additional child tax credit, which is refundable. See IRS Publication 972, “Child Tax Credit,” for qualification details on both credits.

Child and Dependent Care Credit – This credit is used to offset child care costs that are necessary for you or your spouse to work or to look for work. To redeem this credit, you cannot claim your spouse or dependent as the child care provider. You can claim up to 35% of your child care expenses that total up to $3,000 per child, or $6,000 for two or more ($1,050 or $2,100 in actual credit). For details, see IRS Publication 503, “Child and Dependent Care Expenses.”

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Tuition and Fees Deduction – If you do not qualify for the education credits, you may be able to deduct up to $4,000 in qualifying fees and tuition. This deduction had expired but was restored at the last minute for tax year 2014, so take advantage while you can. MAGI limits are $80,000 single, $160,000 for married filing jointly.

Student Loan Interest Deduction – You may be able to deduct up to $2,500 in interest on a qualified student loan if your MAGI is less than $80,000 if single, or $160,000 if married filing jointly.

Both the tuition and fees deduction and the student loan interest deduction are “above-the-line” deductions, meaning you do not have to itemize to take the deduction.

Health Insurance – If you are self-employed and paid for your family’s health insurance, the premiums that you paid for your children’s coverage may be deductible.

Tax credits are always preferable to deductions, because they reduce your taxes by the total amount of the credit. Deductions only lower your taxable income, so your benefit depends on your tax bracket. A $1,000 credit lowers your taxes by $1,000, but a $1,000 deduction for the 15% tax bracket lowers your taxes by $150.

These parental tax benefits will likely save you significant money on your 2014 taxes. Perhaps the savings will be enough to buy a new computer and new locks on the refrigerator and pantry.

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