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Updated for tax year 2022.
There’s no doubting it — having kids is expensive. Between paying for diapers, daycare, and many other baby supplies, new parents can quickly find themselves overwhelmed financially. Fortunately, several tax advantages are available to parents to alleviate some financial responsibility.
1. Child Tax Credit
The Child Tax Credit (CTC) is a tax credit for parents of dependent children designed to help offset the cost of raising kids.
As a parent, you can take advantage of the Child Tax Credit on your tax return if you have a child under the age of 17 whom you claim as a dependent. Under the current tax law, the CTC is worth up to $2,000 per qualifying child. If your adjusted gross income is over $200,00 for single parents or over $400,000 for married parents filing jointly, the credit value is reduced by $50 for each $1,000 of income over those thresholds until it is eliminated entirely.
However, the unique part of the CTC is that it is partially refundable. That means if the credit value exceeds the amount of taxes you owe, you can receive up to $1,500 of the remaining balance as a tax refund. That portion of the credit is known as the Additional Child Tax Credit (ACTC).
Tax Tip: By law, if you claim the ACTC, the earliest the IRS can release your tax refund is mid-February.
2. Child and Dependent Care Credit
While the Child and Dependent Care Credit sounds very similar to the Child Tax Credit, they are two different tax benefits available to parents. The Child and Dependent Care Credit is specifically designed to help reduce the burden of childcare costs incurred while you are working or looking for work.
The credit itself is worth 20-35 percent of qualified expenses. The amount you can qualify to claim depends on how much you spend on child and dependent care and your income level. The maximum amount of qualified expenses you can claim is $3,000 per qualifying dependent or $6,000 for two or more qualifying dependents.
3. Adoption Tax Credit
If you adopted a child and it was finalized in 2022, you may be eligible for the federal adoption tax credit. For 2022 this benefit can credit you up to $14,890 per child. It’s vital to note that this tax credit is not refundable, which means you can only claim the credit if you have a federal tax bill.
This is a one-time credit per adopted child. Eligibility for the adoption tax credit depends on a few circumstances. First, you must have adopted a child (other than a stepchild) in the 2022 tax year to claim the credit. The child must be under the age of 18 or must be either physically or mentally unable to take care of him or herself.
Second, your income must fall within the income limits for the credit. In 2022, families with a modified adjusted gross income of less than $223,410 can claim the full credit. Families with incomes between $223,410 to $263,410 can claim a partial credit. Any family whose income is above $263,410 cannot claim the credit.
4. Earned Income Tax Credit
The Earned Income Tax Credit (EITC) can be a game-changer for lower-income parents. It is a refundable tax credit that ranges from $560 to $6,935 for tax year 2022. The amount you qualify to receive is dependent upon your filing status, how many children you have, and your income level.
For more information about the income limits and how much credit you could expect to claim, check out our Earned Income Tax Credit Calculator.
Tax Tip: By law, if you claim the EITC, the earliest the IRS can release your tax refund is mid-February.
5. Make the most of a 529 plan
It’s never too early or late to start saving for your child’s education. Fortunately, 529 plans offer tax and financial aid benefits when putting money away for your child’s college expenses.
There are two types of 529 plans: college savings plans and prepaid tuition plans. College savings plans work like a Roth 401(k) or Roth IRA by investing your after-tax contributions in mutual funds or similar investments. Prepaid tuition plans let you pre-pay all or part of an in-state public college education costs. They may also be converted for use at private and out-of-state colleges.
Like a Roth IRA, contributions to a 529 plan are made post-tax and are not deductible from federal income taxes. Funds in a 529 plan grow federal tax-free and will not be taxed when the money is withdrawn for qualified education expenses. Some states also offer state income tax incentives to parents, such as state income tax deductions and tax credits for contributions to the state’s 529 plan.
6. Consider a dependent care flexible spending account
Depending on the benefits offered through your employer, you may be eligible to participate in a dependent care flexible spending plan.
Dependent care FSA programs work much like a regular healthcare FSA in that you can take pre-tax dollars out of your paycheck and put them into the account. These funds can be used to pay for qualifying dependent care expenses, such as daycare. For 2022, the max amount you can contribute to a dependent care FSA is $5,000.
7. Adjust your tax withholding
Lastly, when you have a child, you may want to adjust your tax withholding on Form W-4. By adjusting your withholding, you can ensure you have the appropriate amount of taxes withheld from your paycheck so you, ideally, owe less when you file your tax return.
To adjust your withholding, submit a new Form W-4 to your employer. The TaxAct® Withholding Calculator1 can help you determine the right amount of withholding for your new tax situation.