There are a lot of things to love about being a parent, but the increased expense that comes along with your bundle of joy probably isn't at the top of your list. Fortunately, the government tries to ease this burden a little by offering several tax breaks to parents, so that they can keep more of their money to provide for their children.
Below, I discuss five of the most popular tax credits aimed at parents. Take advantage of these if you qualify for them as they could save you thousands of dollars on your tax bill this year.
1. Child Tax Credit
The Child Tax Credit is one of the most popular tax breaks for parents because it's pretty easy to achieve. It's a tax credit, which means it offers a dollar-for-dollar reduction of your tax bill, unlike a tax deduction, which only reduces your taxable income. For tax years prior to 2018, you could claim a $1,000 tax credit for each qualifying child, but starting in 2018, the Child Tax Credit became worth $2,000 per qualifying child. In order to get the credit, your child must meet all six of the following criteria:
- He or she must be 16 years old or younger at the end of the tax year.
- He or she must be your biological, adopted, step-, or foster child; a sibling or step-siblings; or the descendant of any of these people.
- He or she cannot have provided more than half of his or her own support during the tax year.
- He or she must be listed as your dependent on your tax return.
- He or she must be a U.S. citizen or a resident alien.
- He or she must have lived with you for at least half of the tax year.
Your modified adjusted gross income (MAGI), which is your adjusted gross income (AGI) with certain tax deductions added back in, must also be below $200,000 for single adults or $400,000 for married couples in order to claim this credit. High-income households may still claim this credit, but for every $1,000 that their MAGI exceeds the thresholds listed above, their Child Tax Credit will decrease by $50. So if you're a single adult earning $210,000 per year, you'd only be eligible for a $1,500 Child Tax Credit.
Up to $1,400 of the Child Tax Credit is refundable per child. This means that if the Child Tax Credit reduces your tax liability below zero, the government will give you the extra as a refund. So if you owed the government $1,200 and you had a Child Tax Credit for $2,000, the remaining $800 would come back to you as a refund.
2. Adoption Tax Credit
The Adoption Tax Credit pays for expenses related to adopting a child, including court fees, traveling expenses, and adoption fees. You can claim this credit whether you adopt a child domestically or internationally, but it does not apply to individuals who adopt their spouse's child. For the 2019 tax year, you can claim an Adoption Tax Credit of up to $14,080 per qualifying child. A qualifying child is one who is under 18 or who is physically or mentally incapable of self-care.
Your household must have a MAGI under $211,160 in order to claim the full Adoption Tax Credit, and those with MAGIs exceeding $251,160 are not eligible for the Adoption Tax Credit at all. It's also worth noting that this credit applies to a single adoption effort, even if that effort takes several years. For example, if you claimed an Adoption Tax Credit of $4,000 in 2018 and that adoption finalized in 2019 and you paid another $12,000 in qualified adoption expenses during this year, the maximum Adoption Tax Credit you could claim in 2019 would be $10,080 -- the current year's maximum Adoption Tax Credit minus the amount you already claimed in previous years for this adoption effort.
3. American Opportunity Tax Credit
The American Opportunity Tax Credit helps eligible college students or their parents, if they're footing the bill, pay for the cost of higher education. It's worth a maximum of $2,500. You get a credit for 100% of the first $2,000 you spent on qualifying expenses and 25% of the next $2,000.
In order to qualify, the student must meet the following requirements:
- Be pursuing a degree or recognized credential
- Be in his or her first four years of post-secondary education
- Be enrolled at least half-time for at least one academic period during the tax year
- Not have any felony drug convictions on his or her record
Qualifying expenses include tuition costs, supplies, and books, but they do not extend to room, board, or transportation. You also cannot count any money that went toward a qualifying expense but was paid for by a scholarship or grant that the student received.
Single adults with AGIs under $80,000 and married couples with MAGIs under $160,000 are eligible for the full American Opportunity Tax Credit. Those with MAGIs exceeding these thresholds will see their credit phased out until they reach $90,000 or $180,000, respectively, for single and married filers, at which point they are no longer eligible for the credit.
4. Lifetime Learning Credit
This is another tax credit for higher education expenses, but its requirements are a little more lenient. You can claim it if you paid for any postsecondary educational expenses during the year for yourself or your child, as long as you don't exceed the income thresholds. The credit is worth 20% of your qualifying expenses up to $10,000, so the most you can get is $2,000. You cannot claim this tax credit in the same year that you claim the American Opportunity Tax Credit.
You must have a MAGI of less than $58,000, or $116,000 if filing jointly, to claim the full credit. You can get a reduced credit if your MAGI exceeds these thresholds, but individuals with a MAGI over $68,000 and married couples with a MAGI over $136,000 cannot claim this credit.
5. Child and Dependent Care Tax Credit
The Child and Dependent Care Tax Credit is designed for working parents who pay for child care. You can actually claim this credit for other dependents, too, like a spouse, parent, or anyone else who lives in your home for at least half of the tax year and is unable to care for himself or herself. Children must be 12 or younger at the end of the tax year in order to count for this credit.
You, and your spouse if you're married, must have earned income during the year and you must have paid for child care so that you could work or find work. Full-time students can also claim this credit. Married couples must file a joint tax return if they hope to claim this credit.
It's worth up to $3,000 for one qualifying child or up to $6,000 for two or more children. You can claim somewhere between 20% and 35% of your allowable child care expenses, depending on your AGI. You can check yours in this table. Only money you paid a caregiver other than your spouse, your child, another dependent of yours, or the parent of the child in question counts toward your allowable child care expenses.
These tax credits could save you thousands of dollars per year and result in a sizable tax refund if you qualify for them. But be sure to check the requirements every year you plan to claim these credits, as they may change.