It's tax time, the IRS's favorite time of year. With the average American worker paying $8,196 in income tax each year, it's smart to check all the deductions and credits you're entitled to, so you can save as many of your hard-earned dollars as possible. If you're a parent, the IRS offers a number of deductions related to your children and expenses you pay on their behalf.
Here is a list of the ways your kids might save you some cash as you file your taxes this spring.
1. Child tax credit
Each child (under age 18) who primarily lives with you can get you a tax credit of up to $1,000 per year, depending on your income. Even a baby born on December 31 qualifies you for this credit. Note: you must list your child's social security number to receive the credit.
2. Adoption tax credit
Adopting a child can get you a tax credit of as much as $13,400 to reimburse expenses. Adopting a special-needs child may bring you the full $13,400 credit, regardless of the expense involved.
3. Child and dependent care tax credit
If you paid for child care so you could work or look for work, you can receive a credit on up to 35% of those expenses, to a maximum of $6,000 for two children. Note: if you used your employer's flexible spending plan to pay for dependent care through a tax-free account, your child and dependent care tax credit will be reduced by the flexible spending account amount.
4. Larger earned income tax credit
While the earned income tax credit is available to all U.S. taxpayers, a couple without children must earn less than $20,330 to receive any credit. However, couples with children have the chance to qualify for this credit even with household incomes up to $53,267. You can find information on the credit you'll receive at irs.gov.
5. Head of household status
If you're single, have a child, and pay more than half that child's expenses, you can change your tax filing status from single to head of household, which brings you a larger standard deduction and the chance to move into a lower tax bracket.
6. Educational expense credits
If you're paying tuition and fees for a child attending college at least half time, the American opportunity credit will credit you up to $2,500 per student, per year, for four years.
For children enrolled in non-degree or career training classes, the lifetime learning credit provides a credit of up to $2,000 per household for an unlimited number of years.
A tuition and fees deduction, which reduces taxable income by up to $4,000, is available to taxpayers who paid dependents' tuition and fees and who cannot take the American opportunity credit or lifetime learning credit. Generally, those credits will result in greater savings.
If you're helping to repay student loans for a child who was a dependent while attending school, the IRS offers a student loan interest deduction of up to $2,500.
Taxpayers who receive the American opportunity credit cannot also receive the lifetime learning credit. The American opportunity credit, lifetime learning credit, tuition and fees deduction, and student loan interest deduction phase out for higher income taxpayers. You can view eligibility criteria at irs.gov.
When deciding between multiple credit or deduction options, it's important to understand the difference between tax credits and tax deductions:
A tax credit usually saves you more because it reduces the tax you must pay by the full credit amount. A tax credit of $2,000 means you'll pay $2,000 less to the IRS. Some credits are listed as refundable, which means the government will pay you the credit amount, even if you owe no tax when you file.
A tax deduction reduces the amount of your income that's subject to tax. For example, with a $4,000 tax deduction, you avoid paying tax on $4,000 of your income; your actual savings depend on your tax bracket. You'd save $1,000 on your tax bill if you're in the 25% tax bracket ($4,000 * .25).
As a taxpayer (who can claim a dependent on your taxes), you incur expenses all year long due to the caring and providing for your dependents, so be sure to recoup as many of those costs as possible during tax season, with help from the U.S. government! To see an estimate of how much you should save for your children's future higher education, use our college funding calculator.