Everyone knows that kids are expensive, but many don't realize that it costs close to $250,000 to raise a child through age 18 -- not including college. Thankfully, the IRS offers a number of tax breaks to ease the burden for parents. If you have children, here are a few credits it pays to explore.
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1. The Earned Income Tax Credit
Though you don't need to have children to qualify for the Earned Income Tax Credit, or EITC, the more dependents you have, the more value you can get out of the credit. The EITC is designed to help low-income families lower their taxes, and eligibility is based on how much you earn coupled with the number of children in your household.
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You can use the following table to see whether you qualify:
DATA SOURCE: IRS.
While lower earners without kids can still get a fair chunk of money out the EITC, it's families with multiple children who stand to benefit the most. Here's how much the credit might be worth to you:
DATA SOURCE: IRS.
One neat feature of the EITC is that it's a refundable tax credit, which means that if it knocks your tax liability down below $0, you'll get a check for the difference. If you qualify for the EITC based on income, don't owe any taxes, and have three children or more in your household, you could get a check for $6,318.
2. The Child Tax Credit
Tax filers with kids tend to love the Child Tax Credit because it's one of the simplest benefits to calculate. For every child in your household under the age of 17, the IRS lets you claim a $1,000 credit -- easy. There is, however, a catch, and it's that the credit begins to phase out at the following income levels:
- $75,000 for single filers
- $110,000 for couples filing jointly
- $55,000 for married couples filing separately
Here's how that phaseout works: For every $1,000 of income you earn above these limits, your credit will be reduced by $50, so high enough earners aren't able to claim it at all. But if you're a couple filing jointly with a single kid earning $112,000 a year, you'll still get $900 out of the Child Tax Credit. Furthermore, that $50 reduction is applied on a per-family basis, not a per-child basis, so if you're a couple filing jointly with two children earning $2,000 over the limit, you'll lose $100 total, as opposed to twice that amount.
Another thing you need to know about the Child Tax Credit is that it's nonrefundable. Though it can lower your tax bill, if your liability falls below $0, you won't get a check for the difference.
3. The Child and Dependent Care Credit
Many working parents have no choice but to pay for child care to do their jobs. The Child and Dependent Care Credit can help offset the burden by allowing parents to claim some or all of their child care costs.
Now the amount you'll get out of the credit will depend on your expenses and income level. To figure your credit, you'll need to start by seeing how much you spend on child care. The highest number you can base your credit on is $3,000 in child care expenses for a single child or $6,000 in expenses for two children or more. From there, you can claim a portion of those expenses based on your income. If you earn less than $15,000 a year, the credit is worth 35% of your costs. That percentage then drops by 1% for each additional $2,000 of income you earn up to $43,000.
In other words, taxpayers who make $43,000 or more can still claim 20% of up to $3,000 in expenses for a single child or $6,000 in expenses for two or more children, for a maximum of $1,200. In this regard, the Child and Dependent Care Credit is truly unique because it's open to higher earners as well. However, like the Child Tax Credit, it isn't refundable, so if it takes your tax liability down below $0, the IRS gets to keep the difference.
It takes money -- lots of money -- to raise a child, and the more kids you have, the higher your costs are likely to climb. Taking advantage of these tax breaks can put more cash back in your pocket at a time in your life when the bills just seem to keep on coming.
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