While your children are young you have plenty of expenses. Fortunately, some of those expenses can directly or indirectly turn into deductions, exemptions or credits that may mean big savings on your tax bill.
Take a look at the following tax benefits to see which ones could be beneficial for you.
1. Dependency exemptions.
You can’t take a deduction for money you spend on food, clothing, shelter and other basic necessities for your children, but the dependency exemption lowers your taxes in much the same way as a deduction would.
Typically, you can claim an exemption for each child or relative who meets a certain set of tests who you claim as a dependent. In 2015, you can likely reduce your taxable income by $4,000 for each of your dependents.
If you welcomed a new baby into your family this year, remember that you can claim the dependency exemption. It doesn’t matter if the baby was born on January 1 or December 31 – you can still take the exemption for the entire year.
2. Child and dependent care tax credit.
The next big tax saver for many families is the credit child and dependent care expenses.
If you paid someone to take care of your child or another eligible dependent while you worked or looked for work, you may qualify for a credit of up to 35 percent of the first $3,000 you paid the provider for one child. For two or more children, the credit may be as much as 35 percent of up to $6,000 in expenses – that’s a maximum credit of $2,100.
The amount of your credit goes down as your income goes up. If your adjusted gross income is over $15,000, the percentage used to calculate the credit is reduced. If your adjusted gross income is over $43,000, the percentage is 20 percent of expenses.
You can take this credit until your child reaches age 13. You can also take the credit for children over 13 and other qualifying dependents who are physically or mentally incapable of caring for themselves. They must live with you for more than half the year.
Instead of taking a credit, you may be able to use dependent care benefits offered by your employer. These benefits may include contributions paid by your employer to you or directly to the care provider. . You don’t have to pay Social Security or income tax on this money, which makes for better tax savings than the child and dependent care credit.
Another benefit many employers offer is a dependent care flexible spending account. You contribute pre-tax money that’s then used to pay for your child care expenses.
3. Child tax credit.
Thanks to a permanent extension, you may qualify for a $1,000 child tax credit for 2015 and beyond. The credit is good until the year your qualified dependent turns 17.
It starts to phase out when income rises past $75,000 ($110,000 if filing jointly). For taxpayers in lower tax brackets, the credit is refundable, which means they may get a refund even if the credit exceeds their income tax liability for the year.
4. Earned income credit (EIC or EITC).
The earned income credit helps moderate-to-lower income working families make ends meet. It can mean a significant amount of money, depending on your income level.
For example, if you have three or more qualifying children, you could qualify for a maximum credit in 2015 of $6,242. This is a refundable credit, meaning you can get money back even if you had little or no income tax withheld.
To qualify for the earned income credit as a single, head of household, or widowed filer, you must have adjusted gross income of less than $39,131 if you have one child, $44,454 if you have two children, or $47,747 if you have three or more children.
If you are married filing jointly, you may qualify if you have adjusted gross income of less than $44,651 if you have one child, $49,974 if you have two children, or $53,267 if you have three or more children.
5. Adoption credit.
If you adopted or paid adoption expenses in 2015, the adoption credit can be a financial lifesaver. The credit refunds qualified adoption expenses dollar for dollar, up to $13,400 in 2015.
If your modified adjusted gross income is over $201,010 in 2015, your credit is reduced. If it’s $241,010 or more, you won’t qualify for this credit.
6. Head of Household or Qualifying Widow(er) filing status.
It’s not a deduction or credit, but it can save you money. If you’re single, you would normally use the Single filing status.
If you have a child, however, and you pay more than half the cost of maintaining a home for that qualifying child, you may be able to file as Head of Household. This is true even if the child’s other parent claims the dependency exemption.
If your spouse died in 2013 or 2014 and you have a dependent child or stepchild living with you, you may be able to file as a Qualifying Widow(er). (If your spouse died in 2015, you generally file a joint return with him or her for the year.) You should pay less tax by using either of these filing statuses than by filing as Single.
7. Education tax credits.
Kids don’t get any less expensive as they get older, especially when they go to college.
Education tax credits can help significantly, however. The American Opportunity Credit, which expanded and renamed the already-existing Hope Scholarship Credit, can be claimed for up to the first $2,000 you spend on tuition, fees, books, supplies and equipment for yourself, your spouse and your dependent children.
If you qualify, it also gives you 25 percent of the next $2,000 back as a credit. That means you could receive a total credit of up to $2,500 per eligible student. You can now use the American Opportunity Credit for all four years of a child’s undergraduate studies.
The American Opportunity Credit amount you can claim is reduced when your modified adjusted gross income exceeds $80,000 ($160,000 if you file jointly), and disappears when your modified adjusted gross income is over $90,000 ($180,000 for joint filers).
If you don’t qualify for the American Opportunity Tax Credit, you may be able to take the Lifetime Learning Credit. This credit gives you back 20 percent of your tuition and certain related expenses up to $10,000.
No matter how many students are on your return, the most you can take under the Lifetime Learning Credit is $2,000. The maximum Lifetime Learning Credit you can claim is reduced when your modified adjusted gross income exceeds $54,000 ($108,000 if you file jointly), and disappears when your modified adjusted gross income is over $64,000 ($128,000 for joint filers).
You can’t use the same expenses for more than one education tax benefit and you cannot claim both credits for the same student in the same year. You can only claim the American Opportunity Credit for up to four tax years for the same student’s expenses.