Raising children comes with many joys, but it also brings financial challenges. The cost of child care, education, and day-to-day living can quickly add up. Fortunately, parents can find some relief at tax time with various tax credits and deductions. From the Child Tax Credit to education-related benefits, these tax-saving opportunities can help alleviate some of the financial strain. In this guide, we'll explore the tax credits available to parents, how to maximize these deductions, and provide insight into IRS rules regarding dependents.
Child Tax Credit: A Major Tax Break for Parents
One of the most valuable tax credits available to parents is the Child Tax Credit. This credit is designed to offer financial relief for parents by reducing their tax liability based on the number of qualifying children they have. For the 2024 tax year, parents can claim up to $2,000 per qualifying child under the age of 17. Additionally, up to $1,700 of the credit is refundable through the Additional Child Tax Credit, meaning that even if you don’t owe federal income tax, you may still be able to receive this portion as a refund.
Income Limits and Phaseout
Like most tax credits, the Child Tax Credit has phaseout thresholds, which means the credit gradually decreases as your income increases. For single filers, the phaseout begins at $200,000 in adjusted gross income (AGI), and for married couples filing jointly, it begins at $400,000. This means that families with incomes above these thresholds may receive a reduced credit or be ineligible for it altogether.
Further Reading: Stay informed about the Child Tax Credit payment schedule for 2025
The American Rescue Plan and Temporary Changes
In 2021, the American Rescue Plan (ARP) temporarily expanded the Child Tax Credit in response to the pandemic. The credit was raised to $3,600 for children under 6 and $3,000 for children aged 6 through 17. Additionally, the credit was made fully refundable, which means that even families with no tax liability could benefit from it. However, this temporary expansion was limited to the 2021 tax year. For 2024 and beyond, the credit reverted to its original $2,000 per child limit.
The ARP also introduced advance payments of the Child Tax Credit, which were issued throughout 2021. This allowed eligible families to receive part of their credit early, rather than waiting until filing their 2021 taxes in 2022. Families could receive half of their total credit as an advance, and the remaining amount would be reconciled on their tax returns.
The Earned Income Tax Credit (EITC) for Parents
Another tax benefit that parents can take advantage of is the Earned Income Tax Credit (EITC). The EITC is a refundable credit aimed at helping lower-income families reduce their tax liability. The amount of the EITC is based on your income and the number of qualifying children you have. For 2024, families with three or more eligible children may qualify for the following EITC thresholds:
- $59,899 for Single, Head of Household, or Married Filing Separately filers.
- $66,819 for Married Filing Jointly filers.
The amount of the EITC decreases as your income rises and is phased out based on your filing status and the number of children you have. If you meet the income requirements, the EITC can significantly reduce the amount of tax you owe.
Further Reading: Discover how the Child Tax Credit can benefit your family
Child and Dependent Care Credit
Many parents face the challenge of covering child care costs, and the IRS provides a tax credit to help offset these expenses. The Child and Dependent Care Credit allows you to claim a percentage of your qualifying child care expenses, up to a certain amount.
For 2024, parents can claim up to 35% of their child care expenses, which can be as much as $3,000 for one child or $6,000 for two or more children. This percentage can vary depending on your income—lower-income families can claim the full 35%, while higher-income families will claim a reduced percentage.
If your employer offers a dependent care flexible spending account (FSA), you can contribute up to $5,000 of pre-tax income to help cover child care costs. However, if you also claim the Child and Dependent Care Credit, you must subtract the amount reimbursed through your FSA from the total child care expenses you claim.
In 2021, the American Rescue Plan temporarily increased the Child and Dependent Care Credit. The maximum amount of eligible expenses increased from $3,000 to $8,000 for one child and from $6,000 to $16,000 for two or more children. Additionally, the percentage of qualifying expenses that could be claimed increased to 50%, and the phaseout for higher-income families was raised to $125,000 of adjusted gross income (AGI).
Further Reading: Learn about claiming dependents in your tax return
Education Tax Benefits: Credits and Deductions for Parents
As children grow older, education-related costs become a significant financial burden for many parents. Fortunately, there are several tax credits and deductions available to help offset the cost of higher education.
American Opportunity Credit (AOC)
The American Opportunity Credit is a tax credit that allows you to claim up to $2,500 per student for the first four years of post-secondary education. This credit is available for tuition, fees, and course materials for students attending at least half-time.
To qualify for the full credit, your income must be below $80,000 for single filers and $160,000 for married couples filing jointly. The credit phases out for higher-income families.
Lifetime Learning Credit (LLC)
The Lifetime Learning Credit offers up to $2,000 per household for tuition and fees for qualifying post-secondary education. This credit is available for a broader range of students, including those attending part-time or in non-degree programs. Unlike the AOC, the LLC is available for an unlimited number of years and can be claimed even if the student is not pursuing a degree.
The income limits for the LLC are lower than the AOC. For 2024, the income limit for single filers is $80,000 and $160,000 for married couples filing jointly.
529 Plans: Saving for Education
A 529 plan is a tax-advantaged savings plan that helps parents save for their children's education expenses. Contributions to a 529 plan grow tax-deferred, and withdrawals used for qualified education expenses, such as tuition and room and board, are tax-free. Since 2018, 529 plans have expanded to cover private school tuition for children in kindergarten through high school.
While a 529 plan is not a credit or a deduction, it provides valuable tax sheltering benefits that can help parents save for education without incurring federal income tax on the investment earnings.
Maximizing Your Tax Savings: Key Strategies
To get the most out of your tax credits and deductions, consider the following strategies:
- Know the eligibility requirements: Ensure that you meet all the IRS rules regarding dependents and income thresholds for each credit. For example, the Child Tax Credit and the Earned Income Tax Credit have specific income limits, and the Child and Dependent Care Credit requires qualifying child care expenses.
- Claim all applicable credits: Many parents are eligible for more than one credit, such as the Child Tax Credit, the Earned Income Tax Credit, and the Child and Dependent Care Credit. Take advantage of each one to maximize your deductions.
- Use 529 plans: If you have children who are heading to college, consider contributing to a 529 plan to take advantage of the tax-sheltered growth on your savings.
- Plan for education costs: If you're paying for tuition or other education-related expenses, consider whether you qualify for the American Opportunity Credit or the Lifetime Learning Credit.
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