Updated for tax year 2017.
While your children are young you have plenty of expenses. Fortunately, some of those expenses can directly or indirectly turn into 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 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 2017, you can reduce your taxable income by $4,050 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 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 (AGI) is over $15,000, the percentage used to calculate the credit reduces by 1 percent for every $2,000 of income. It continues to go down until it reaches 20 percent. 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 2017. 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, EITC, or working family tax credit).
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 your filing status is single and you have three or more qualifying children, you could qualify for a maximum credit in 2017 of $6,269. That 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, your AGI must be less than $39,617 if you have one child, $45,007 if you have two children, or $48,340 if you have three or more children. You can also qualify for the credit if you have no qualifying children, however, your AGI must be below $15,010.
If you are married filing jointly, you may qualify if your AGI is less than $45,207 if you have one child, $50,597 if you have two children, or $53,930 if you have three or more children. If you file a joint return but have no qualifying children, the income limit is $20,600 to take advantage of the credit.
5. Adoption credit.
If you adopted or paid adoption expenses in 2017, the adoption credit can be a financial lifesaver. The credit refunds qualified adoption expenses dollar for dollar, up to $13,570 in 2017.
If your modified AGI is over $203,540 in 2017, your credit is reduced. If it’s $243,540 or more, you won’t qualify for the credit.
6. Head of Household or Qualifying Widow(er) filing status.
Filing as the 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.
If you have a child, however, and pay more than half the cost of maintaining a home for that qualifying child, you can file as Head of Household. That is true even if the child’s other parent claims the dependency exemption.
If your spouse died in 2015 or 2016 and you have a dependent child or stepchild living with you, you may file as a Qualifying Widow(er). If your spouse died in 2017, you should generally file a joint return with him or her for the year. In many cases, you’ll pay less tax filing under either of those statuses than 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 can be claimed for up to the first $2,000 spent on tuition, fees, books, supplies, and equipment for yourself, your spouse and 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 claim the American Opportunity Credit for all four years of a child’s undergraduate studies.
The amount of the American Opportunity Credit you qualify for decreases when your modified AGI exceeds $80,000 ($160,000 if you file jointly). It disappears entirely when your modified AGI is over $90,000 ($180,000 for joint filers).
If you don’t qualify for the American Opportunity Tax Credit, you may be eligible for the Lifetime Learning Credit. That credit gives you back 20 percent of your total tuition and specific related expenses up to $10,000.
No matter how many students are on your return, however, the maximum Lifetime Learning Credit you can claim is $2,000. That maximum gets reduced when your modified AGI exceeds $54,000 ($108,000 if you file jointly). It disappears when your modified AGI is over $64,000 ($128,000 for joint filers).
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.