Did you know July 24 is National Parents Day? It falls on the 4th Sunday each July, and was established by the US government in 1994, as a way of “recognizing, uplifting, and supporting the role of parents in the rearing of children”.
In addition to a day of commemoration for parents, there are also a host of tax deductions and credits available for parents to reduce their annual income tax liability.
To help celebrate this day, we want to run through these potential deductions and credits, and see how it might lower your tax bill come next April!
Deduction for Dependents
The IRS allows you to deduct up to $4,050 per child in 2016. The dependent must be a “qualifying child”, which can include a natural or adoptive child, stepchild, or foster child. The child must also live with you for more than half of the year, and be no older than 19 by the end of the year.
If your child is a full-time student for the year, then you may claim him or her as a dependent as long as they are under 24 by the end of the year. The regulation defines “full-time student” as attending school for at least part of five calendar months during the year.
Child Tax Credit
You can get a credit against your income tax for any children who are under the age of 17 by the end of year. The credit is a direct reduction in your income tax bill of up to $1,000 per child.
The child must qualify as a dependent as described above and you must provide more than half of the child’s support during the year. The child must also be a US citizen, and must have lived with you are more than half the year.
There is also an income tax limitation involved with the credit. The credit begins to phase out for a married couple with a modified adjusted gross income of $$110,000, $75,000 for single filers and heads of household, and $55,000 for married couples filing separately. For each $1,000 of income above those limits, the child tax credit is reduced by $50.
Child and Dependent Care Credit
This provision enables you to claim a credit for expenses incurred in taking care of your children while you are at work. In order to qualify, you must have paid someone else to care for your children, such as a daycare center. Your qualifying children must also be 12 or younger by the end of the year, and claimed as a dependent on your tax return.
Both you and your spouse must have earned income, and you must file a joint income tax return.
You can claim expenses ranging between 20% to 35 % of $3,000 for one child, and $6,000 for two or more children, and your earned income must exceed the amount that you pay for childcare expenses.
The lower percentage will apply to higher income levels, and the minimum you can claim as a credit is 20% of expenses paid, regardless of your income level (there is no maximum income limit).
Earned Income Tax Credit
This is a tax credit that reduces your income tax liability based on a combination of income and family size. Your investment income cannot exceed $3,400 for the year. Your adjusted gross income will be limited based on your filing status, the number of qualifying children you are claiming, and of course your income level.
For example, if you’re married filing jointly, and you have two qualifying children, then the maximum income you can earn to qualify for the credit is $50,198 for 2016. The maximum credit will be $5,572, with two children, but you can also get up to $506 even with no qualifying children.
If you’re in the process of adopting a child, or plan to in the near future, you can also get a tax credit for doing so. The maximum amount of the credit is $13,460 per child for 2016. The amount of the credit you can take is limited by the amount of your tax liability. That is to say that the adoption credit cannot create a tax refund. However, any unused portion of credit can be carried forward for up to five years against future tax liabilities.
The credit is available for reasonable and necessary adoption fees, legal costs, travel expenses, and any other expenses directly connected to the adoption of a child.
These are just some of the credits available to families. There are also credits for higher education, like The American Opportunity Tax Credit and the Lifetime Learning Credit.
When you use TurboTax you don’t need to know all of these tax credits and deductions available for you and your family. TurboTax will ask simple questions about you and give you the tax deductions and credits that you deserve based on answers to your questions.