Updated for tax year 2021.
You have plenty of expenses while your children are young. Fortunately, some of those expenses can directly or indirectly turn into tax credits and exemptions 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 your family this tax season.
1. Child and dependent care tax credit
A big tax saver for many families is the child and dependent care tax credit. 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 this credit.
Qualifying expenses for this tax credit include daycare or babysitter fees, day camp/summer camp fees, and nursery, pre-school, or pre-K fees. In-home care costs for disabled dependents also qualify.
This tax break changed significantly for tax year 2021:
- The maximum credit percentage increased to 50 percent (up from 35 percent), depending on your adjusted gross income (AGI).
- You can claim up to $4,000 for one qualifying dependent and up to $8,000 for two or more qualifying dependents (up from $3,000 and $6,000, respectively).
- The AGI threshold where the credit starts phasing out increased to $125,000 (up from $15,000).
- Unlike prior years, this tax credit is fully refundable in 2021, meaning you can claim the credit as a tax refund even if you have no tax liability.
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, which allow you to contribute pre-tax money and use it to pay for your childcare expenses.
2. Child Tax Credit
The Child Tax Credit (CTC) also changed considerably for families in 2021:
- The maximum credit amount increased from $2,000 to $3,600 for each child age 5 and under and up to $3,000 for children ages 6-17.
- Children age 17 now qualify for the credit — previously only children under 17 could qualify.
- Many families received a portion of their CTC as advance monthly payments in 2021.
- The CTC is fully refundable in 2021, so you can claim the credit even if you don’t owe taxes. In prior years, only a portion of the child tax credit was refundable.
- The additional credit amount starts phasing out once your AGI is 150,000 for joint filers, $112,500 for head-of-household filers, or $75,000 for single filers.
3. Earned Income Credit (EIC, EITC, or working family tax credit)
The Earned Income Tax Credit (EITC) helps moderate- to lower-income working taxpayers make ends meet. It can mean a significant amount of money, depending on your income level.
Working adults age 19 or older with or without children now qualify for the Earned Income Credit (with certain exceptions for students, homeless youth, and those who were formerly in foster care).
Thanks to the American Rescue Plan, the maximum tax credit amount you can qualify for in 2021 without children is $1,502 (this will decrease to $560 in 2022). The maximum amount you can qualify for with three or more children is $6,728 ($6,935 in 2022).
This credit is refundable as well, so you can get money back even if you had little or no income tax withheld.
To claim this tax break, your income must be below a certain threshold depending on your filing status. Try using our EITC calculator to see if you might qualify for the credit and what the amount might be.
4. Adoption credit
If you adopted or paid adoption expenses in 2021, the Adoption Tax Credit can be a financial lifesaver. The credit refunds qualified adoption expenses dollar for dollar, up to $14,440 in 2021.
Court costs, attorney and agency fees, and travel costs are all deductible expenses for this credit.
If your modified AGI is over $216,660 in 2021, your credit is reduced. If it’s $256,660 or above, you won’t qualify for the adoption tax credit.
5. Head of household or qualifying widow(er) filing status
Filing as head of household or widow(er) isn’t a credit, but it may save you money.
If you’re single, you would normally use the single filing status. However, If you have a child and pay more than half the cost of maintaining a home for that qualifying child, you can file as head of household.
If your spouse died in 2021 and you have a dependent child or stepchild living with you, you may file as a qualifying widow(er). With this filing status, you can use joint tax return rates and the highest standard deduction amount.
In many cases, you’ll pay less tax filing under either head of household or qualifying widow(er) status than you would if you were filing as single.
6. Education tax credits
Kids don’t get any less expensive as they get older, especially when they go to college. Thankfully, education tax credits can help significantly.
You can claim the American Opportunity Credit for up to the first $2,500 spent on tuition, fees, books, supplies, and equipment for yourself, your spouse, and dependent children. The amount of the American Opportunity Credit you qualify for decreases when your modified AGI exceeds $80,000 ($160,000 if you file jointly).
If you don’t qualify for the American Opportunity Tax Credit, you may be eligible for the Lifetime Learning Credit instead. This credit gives you back 20 percent of your total tuition and specifically related expenses up to $10,000. No matter how many students are on your return, the maximum Lifetime Learning Credit you can claim is $2,000. That maximum gets reduced when your modified AGI exceeds $69,000 ($138,000 if you file jointly).
One caveat to keep in mind is that you can’t claim the same expenses for more than one education tax benefit. You also can’t claim both credits for the same student in the same year. The American Opportunity Credit is only available for up to four tax years for the same student’s expenses.