By: Daniel Keaton, Manager
Having children is one of the most joyful experiences in a person’s life, but from a financial standpoint, it’s also one of the most frightening. According to a 2013 report released by the United States Department of Agriculture, parents are projected to spend $241,080 on a child born in 2012. This includes housing, food, transportation, clothing, healthcare, education, childcare, and other miscellaneous expenses (i.e. cell phones, haircuts, etc.) What terrifies parents even more is that the cost of college isn’t even included in this statistic! This figure is based on an average middle-income family; so depending on where you live and how much you earn, this number could fluctuate.
Fortunately, the Federal Government has implemented certain tax breaks that can help families save more money their tax returns. The top tax breaks for parents include:
Exemptions for Dependents
A taxpayer may claim a qualifying child as a dependent, which increases the number of exemptions the taxpayer can claim. To be considered a qualifying child, the child must:
- Be the taxpayer’s child, stepchild, eligible foster child, brother, sister, stepbrother, stepsister or a descendant of any of these.
- The qualifying child must be younger than the taxpayer and either under the age of 19 or a full-time student under the age of 24, or any age if the individual is totally and permanently disabled.
- Live with the taxpayer for more than half the year.
- Not provide more than half of his/her own support.
- Not file a joint return
- Not be a qualifying child of another taxpayer with higher priority under the tiebreaker rules.
Child Tax Credit
Parents with qualifying children under the age 17 are eligible to take the Child Tax Credit which is $1,000 per child. This credit is subject to phase out and begins at modified AGI over $110,000/year for married filing joint taxpayers, $75,000 for single, head of household, or qualified widow(er), and $55,000 for married filing separate taxpayers.
Child and Dependent Care Credit
This credit is for care expenses for dependent(s) under the age of 13 that allow taxpayers to work or look for work. The credit is for 20% to 35% of qualifying expenses depending on the taxpayer’s AGI level. The maximum qualifying expenses for the child and dependent care credit is $3,000 for taxpayers with one qualifying individual and $6,000 for taxpayers with two or more qualifying individual.
Earned Income Tax Credit
This credit is for working taxpayers with the following number of children:
- 0 – AGI < $14,590 ($20,020 if MFJ)
- 1 – AGI < $38,511 ($43,941 if MFJ)
- 2 – AGI <$43,756 ($49,186 if MFJ)
- 3 or more – AGI <$46,997 ($52,427 if MFJ)
Note: The maximum credit allowed is $496 for no children, $3,305 for one child, $5,460 for two children, and $6,143 for three or more children. In addition to having earned income and AGI below the requirements above, the taxpayer must meet the following requirements
- The taxpayer must have earned income.
- The taxpayer’s investment income cannot be more than $3,350 in 2014.
- The taxpayer’s filing status may not be MFS.
- The taxpayer (and spouse if married) and the qualifying child must have valid social security numbers.
- The taxpayer (or spouse if married) cannot be qualifying children on another taxpayer’s tax return.
Education Tax Credits
- American Opportunity Credit
Student must be enrolled in a program that leads to a degree, certificate, or other recognized educational credential. Student must take at least one-half of the normal full-time workload for the student’s course of study for at least one academic period beginning during the tax year. Maximum credit is $2,500 per student, which is 100% of the first $2,000 of eligible expenses and 25% of the next $2,000 of expenses. Student must be free of any felony conviction for possessing or distributing a controlled substance. To qualify for the credit, the student must not have completed the first four years of post-secondary education at an eligible educational institution. The credit can only be claimed for four tax years for any one student.
- Lifetime Learning Credit
The lifetime learning credit is a credit equal to 20% of up to $10,000 of qualified tuition and fees paid during the tax year. Maximum credit is $2,000. This credit is per taxpayer, not per student, thus a family’s maximum credit is the same regardless of the number of students in the family. There is no workload requirement and non-degree courses are eligible as long as the courses are used to improve job skills. There is also no limit on the number of years for which the credit can be claimed for each student.
Adoption Credit
This credit is for qualified adoption expenses incurred for the legal adoption of a child under the age of 18 or for the adoption of an incapacitated or special needs person (regardless of age). This credit is for $13,190 for the adoption of a special needs child, or for expenses up to $13,190 per child for all other adoptions. This credit is phased out for modified AGI between $197,880 and $237,880.
Tuition and Fees Deduction
Taxpayers are allowed to deduct tuition and fees for qualified higher education expenses paid. Taxpayers can deduct up to $4,000 for taxpayers whose modified AGI is $65,000 or less ($130,000 for married filing joint taxpayers). Taxpayers can deduct up to $2,000 if their modified AGI is $65,001 to $80,000 ($130,001-$160,000 married filing joint). Taxpayers with modified AGI greater than $80,000 ($160,000 MFJ) aren’t eligible for this deduction.
Student Loan Interest
Taxpayers can deduct up to $2,500 of interest paid on qualified education loans for college or vocational school expenses as an adjustment to income. The deduction is available for interest on qualifying loans for the benefit of the taxpayer or the taxpayer’s spouse or dependent at the time that debt was incurred. This deduction is subject to phase out limitations based on the taxpayer’s modified adjusted gross income (AGI).
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The information contained in the Knowledge Center is intended solely to provide general guidance on matters of interest for the personal use of the reader, who accepts full responsibility for its use. In no event will CST or its partners, employees or agents, be liable to you or anyone else for any decision made or action taken in reliance on the information in this Knowledge Center or for any consequential, special or similar damages, even if advised of the possibility of such damages.