3 Ways Parents Pay Too Much in Taxes

This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.

There are some tax breaks parents don’t always take full advantage of. Keep reading to find out more. [[{“value”:”

When my first child was born, a colleague congratulated us on our “new, tiny tax shelter.” We’re both financial planners, so the humor was well-received. But they were right. While kids are expensive, there are some major tax breaks available to help offset the cost of raising a child.

Of course, there are some tax breaks for parents that are well known (and are typically applied automatically by most tax software). This includes the extremely valuable Child Tax Credit, which is worth as much as $2,000 per qualifying child, as well as the Earned Income Tax Credit (EITC).

On the other hand, there are some tax breaks for parents that are not quite as well known. Here are three that you might want to check out.

1. Don’t assume day care is the only way to get this credit

It can be difficult to budget for child care, but fortunately there is a tax break designed to help. The Child and Dependent Care Credit is worth as much as 35% of qualifying child care expenses, up to $3,000. For two or more children, the credit can be based on as much as $6,000 of qualifying expenses. There are plenty of rules regarding the credit, but the general idea is that the children must be under 13 and the care expenses must have been incurred so the parents could work.

One of the most common misconceptions about the Child and Dependent Care Credit is that it is only to cover the cost of daycare for very young children. But this isn’t the case. If the children are under 13 and you’re working for the most part while they’re receiving care, other forms of care such as babysitters, after school programs, and summer camps can qualify.

2. Save for college the right way

There are several valid ways to save or invest for college expenses, but one of the more popular ways is to use a 529 savings plan.

529 plans are run by the states. Each state has its own 529 plan, and you don’t necessarily have to use your state’s plan. However, by doing so, you could get a rare double tax break (assuming you live in a state that assesses income tax).

Here’s why. Contributions to 529 plans are not deductible on your federal tax return, but eventual withdrawals will be 100% tax free, regardless of how well your investments have performed. However, if you use your state’s plan, your contributions will often be deductible on your state tax return. So, you get the combination of a modest tax break for your contributions and unlimited tax-free compounding.

3. Many parents don’t calculate medical expenses correctly

If you’re a parent, I’m probably not telling you anything you didn’t know by saying “kids are expensive.” And for obvious reasons, the average couple with two kids is likely to spend about twice what they would on medical expenses without kids.

The IRS allows people who itemize to deduct medical expenses that exceed 7.5% of adjusted gross income (AGI). This may sound like a high bar to many people — after all, this means that if your AGI is $100,000 this year, you’ll need more than $7,500 in medical expenses to qualify. But when you see the full list of expenses that count, you might be surprised at what your qualifying expenses truly are.

Some medical expenses are obvious, like the co-pays when you or your child have a doctor’s appointment. But here are some examples that count toward the medical expense deduction from the IRS’s full list that are often overlooked:

Dental careVision carePrescriptionsAny medical-related home expenses (like adding grab bars in a bathtub)Fertility treatmentsExpenses related to traveling to get medical care

How much could you save?

Every tax situation is different and not all of these potential tax savings strategies will apply to everyone. But these are three ways that many parents end up paying more taxes than they should, and if one or more of them apply to you, taking steps to correct it can potentially save you hundreds or even thousands of dollars.

Alert: our top-rated cash back card now has 0% intro APR until 2025

This credit card is not just good – it’s so exceptional that our experts use it personally. It features a lengthy 0% intro APR period, a cash back rate of up to 5%, and all somehow for no annual fee! Click here to read our full review for free and apply in just 2 minutes.

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

“}]] Read More