3 of the Biggest Tax Breaks for Parents

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Having kids is expensive. Read on for ways you can get some tax relief. [[{“value”:”

Having children requires a lot of sacrifice — not just your time, but your money, too. The Motley Fool Ascent research finds that it costs roughly $300,000 to raise a child from birth through the age of 17. And as you might notice, that doesn’t even account for the cost of college.

The good news, though, is that as a parent, you may be entitled to certain credits when you file your taxes. And that’s a very good thing, because unlike tax deductions, which simply exempt some of your income from taxes, credits reduce your tax burden on a dollar-for-dollar basis.

To put it another way, a $1,000 tax credit will result in more savings for you than a $1,000 tax deduction. With that in mind, here are some big tax breaks in credit form that all parents should be aware of.

1. The Child Tax Credit

The Child Tax Credit got a major boost in 2021 as part of lawmakers’ massive stimulus package that year. Because that boost wasn’t extended beyond 2021, some people are under the impression that the Child Tax Credit went away. But that’s not true — it simply reverted to its former maximum value, which is currently $2,000 per child under age 17.

Now, some tax credits are not refundable, so the most they can do is reduce your tax liability to $0. The Child Tax Credit is partially refundable up to $1,600 per child. But there’s a proposal in the works that could expand refundability for the Child Tax Credit for 2023.

Another great thing about the Child Tax Credit is that it’s not just for lower earners. You can claim the full credit if your income is $200,000 or less as a single tax filer or $400,000 or less as a married couple filing jointly.

Beyond these limits, the credit isn’t automatically off the table — but it starts to get reduced. If your income is high enough, you might get nothing even if you otherwise have qualifying children.

2. The Child and Dependent Care Credit

The Child and Dependent Care Credit has a maximum value of $2,100, but the amount you’re eligible for will hinge on three factors:

What you spend on child careHow many children you haveWhat your income looks like

The credit, which is not refundable, allows you to claim between 20% and 35% of child care costs. But you can only apply the appropriate percentage to child care fees of up to $3,000 for one qualifying child, or up to $6,000 for two or more qualifying children.

Is your head spinning yet? Yeah, this credit will do that to you.

Here’s an example to show you how to figure the credit. Let’s say you have two kids and spend $10,000 a year on child care. Since your maximum claiming limit, if you will, for child care is $6,000, forget about the extra $4,000 you spent.

Now, let’s say you earn over $43,000 a year. In that case, you can only claim 20% of $6,000, or $1,200. If you were a much lower earner with an income of under $15,000, you’d be allowed to claim 35% of $6,000, or $2,100. Then again, if you were earning under $15,000, it’s unlikely that you’d be able to afford $6,000 in child care expenses.

At first, the Child and Dependent Care Credit might seem like a bit of a dud since it only lets you write off a limited portion of your total expenses. But remember, if you pay for child care, you can also contribute to a dependent care FSA, which allows you to allocate up to $5,000 (or $2,500 if married and filing separately) in pre-tax dollars for child care expenses.

Now remember, that $5,000 isn’t a credit, so it doesn’t shave $5,000 off of your tax bill. But if you’re in the 22% tax bracket, it saves you $1,100 by exempting that much income from taxes.

3. The Earned Income Tax Credit

The Earned Income Tax Credit (EITC) is a unique credit in that it’s fully refundable. And while you don’t have to be a parent to claim it, you may be more likely to qualify for it if you have kids.

Eligibility for the credit depends on your income and the number of qualifying children in your household. You can consult this table to see if you qualify and what the credit might be worth to you.

Unfortunately, roughly 20% of eligible tax filers miss out on the EITC every year. So it pays to run the numbers (ideally, using tax software) to see if you’re eligible.

Being a parent can be tough from a financial standpoint. Thankfully, the IRS throws parents a bone in the form of these tax credits, so it pays to see if you qualify for any of them.

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