For parents, each little bundle of joy can also bring savings come tax time. PaycheckCity has compiled a list of tips to be aware of to help parents with their federal tax returns this year. From child care credits to higher education credits, parents can take advantage of what Uncle Sam has to offer this tax season.
1. Dependents: For every qualified dependent an individual claims, their taxable income is reduced by $3,900. Have two or three dependents? You could be seeing substantial savings on your tax bill. Deciding who qualifies in your life as a dependent is a critical first step to claiming other tax credits. Intuit, the maker of TurboTax, has a helpful checklist on determining who qualifies as a dependent. For those wanting a full rundown, IRS Publication 501 details all of the fine print.
2. Child tax credit: For every qualifying child under 17, you may receive up to $1,000 per child through the Child Tax Credit. If you receive less than the full amount of the credit, you could be eligible for the Additional Child Tax Credit. The amount you receive depends on your income. A tax credit reduces the amount of income tax you may have to pay. Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself. More information is available from the IRS in Schedule 8812 and Publication 972.
3. Child and dependent care credit: If you paid for someone to care for a qualifying person such as a child, spouse, or dependent so that you could work or look for work, you may be able to claim the child and dependent care credit. Be careful though, as the payments for care cannot be paid to your spouse, to the parent of the qualifying person, to someone you claim as your dependent on your tax return, or to your child who will not be age 19 or older by the end of the year regardless of whether or not he or she is your dependent. Publication 503 from the IRS has more information.
4. Earned income tax credit: This is a refundable tax credit for low to moderate income working individuals and couples—particularly those with children. Families with three or more children may receive a credit of up to $6,142 in 2014. The IRS has published a helpful tool that assists individuals in determining whether or not they should claim the earned income tax credit.
5. Adoption credit: Certain expenses incurred for the adoption of a child can qualify for the adoption tax credit. The maximum amount of the credit for each eligible child is $12,970. Unused portions of the credit can be carried forward up to five tax years. IRS Form 8839 details the requirements.
6. Higher education credits: The American Opportunity Credit and Lifetime Learning Credit may reduce the amount of tax you owe if you paid for higher education for yourself or for an immediate family member. Details for both credits can be found in Publication 970.
7. Student loan interest: You may be able to reduce the amount of your income subject to tax by up to $2,500 by deducting interest that you paid on a qualified student loan. If you paid $600 or more of interest on a qualified student loan during the year, you will receive a Form-1098_E from the entity to which you paid the student loan interest. Publication 970 details the requirements.
8. Self-employed health insurance deduction: If you were self-employed and paid for health insurance, you may be able to deduct premiums you paid to cover your child under the Affordable Care Act. Children under 27, even if not your dependent, can fall under this deduction. See IRS Notice 2010-38 for more details.
As with any tax planning situation, be sure to consult your tax adviser with any questions concerning maximizing the tax benefits of being a parent.