During tax season, do you spend hours or even days wrestling with old receipts, canceled checks, W-2 forms, 1099s, and statements from your banks, credit card companies, and mortgage company, trying to document every possible deduction and lower your federal income tax bill?
Complying with tax filing requirements – and trying to squeeze every possible deduction out of an increasingly complex tax code – is a big undertaking. According to the IRS, the average individual taxpayer spends about seven hours trying to comply with their tax filing requirements, including time spent on recordkeeping, tax planning, and completing and submitting tax forms. For business returns, that estimate jumps to 19 hours. Of the more than 135 million tax returns filed in 2018, more than 80 million were prepared by a tax professional, and many self-preparers rely on tax software from firms such as TurboTax to complete their tax forms.
The IRS offers free tax help 24 hours a day, seven days a week, with tools for electronically filing returns, calculating withholding, and checking on estimated tax payments. Yet despite help from tax pros, DIY software like what you get from H&R Block, and the IRS, many taxpayers with children still worry that they’re leaving money on the table. If you’re one of them, here’s a look at the deductions and credits you might be eligible to claim.
The Lifetime Financial Cost of Having a Child
Raising a family is expensive. Some expenses are apparent, such as food, clothing, child care, medical bills, health insurance, and education. Others are more difficult to quantify, such as the possible loss of income when a parent stays home to care for a child and the additional living space, utilities, and larger vehicles needed for bigger families.
You might not be keeping a running tally of how much it costs to raise your child, but someone is. In 2016, the U.S. Department of Agriculture released its 2015 Expenditures on Children by Families report, estimating what the average, middle-class couple would spend to raise a child born in 2015. The agency estimated that families spend between $12,350 and $13,900 annually, or $233,610 from birth through age 17, on child-rearing expenses. That’s before covering any higher education costs.
While the expenses vary considerably based on household income level, it’s safe to assume that every parent is interested in taking advantage of every opportunity to recover their tax dollars. To that end, here’s a look at the tax deductions and credits that might relate to your family’s situation.
Child-Related Deductions & Credits
After you’ve collected, sorted, and totaled your income and expense information, you or your tax advisor can begin to complete the tax forms you must submit to the IRS. The information on those completed forms determines whether you will need to send a check for additional taxes due, get a refund of the taxes you’ve paid throughout the year, or break even.
Pay particular attention to the following deductions and credits that can minimize your tax bill.
1. Standard or Itemized Deductions
When you file your return, you have the option of taking either the standard deduction or itemizing deductions, whichever results in a lower tax bill.
The standard deduction is a set amount based on your filing status. For 2019 returns, the standard deduction is as follows:
|Filing Status||Standard Deduction Amount|
|Married Filing Jointly & Surviving Spouse||$24,400|
|Married Filing Separately||$12,200|
|Head of Household||$18,350|
The IRS also provides an additional standard deduction of $1,300 for married people who are age 65 or older or blind. For unmarried taxpayers who are age 65 or older or blind, the additional standard deduction is $1,650.
Itemized deductions include home mortgage interest, state and local taxes, and charitable contributions.
Itemized deductions also include out-of-pocket costs paid for medical expenses that exceed 10% of your adjusted gross income (AGI) for 2019. For taxpayers in relatively good health who have access to employer-subsidized health insurance, that can be a difficult threshold to meet. However, parents of children with special needs such as autism, cerebral palsy, and ADHD may have more expenses that fit into this category. If you’re one of these parents, consider how much you pay for such items as:
- Special schooling, training, or therapy, including exercise programs recommended by qualified medical personnel
- Aides required for the child to benefit from regular or special education
- Diagnostic evaluations
- Some home improvements
- Special medical diets
When you add these costs to your other medical expenses – such as insurance premiums, copays, and prescription costs – they might exceed the 10% of AGI threshold and make itemizing beneficial.
To itemize deductions, track the amount you spend in these categories during the year and deduct them on Schedule A attached to your Form 1040. If your total itemized deductions exceed the available standard deduction for your filing status, you should opt to itemize your deductions.
2. Deduction for Student Loan Interest
The Student Loan Interest deduction is available even if you use the standard deduction rather than itemize deductions on your return. It allows you to deduct up to $2,500 of interest on qualified student loans that you were legally obligated to repay on behalf of yourself, your spouse, or your dependents.
The deduction is limited for higher-income taxpayers. For 2018, the deduction is gradually phased out if your modified adjusted gross income (MAGI) is between $65,000 and $80,000 for single filers (or $135,000 and $165,000 for married couples filing jointly). If your MAGI is greater than the upper limit for your filing status, you cannot claim this deduction.
3. Tax Credits for Education
The tax code provides a number of education-related tax credits that benefit parents who help fund their dependent child’s college education. Tax credits are more valuable than tax deductions as they’re a dollar-for-dollar reduction of any income taxes you may owe. Some tax credits are even refundable, meaning you can receive a refund if the credit is greater than the amount of tax you owe for the year.
American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC) is worth up to $2,500 per student, per year. It’s a partially refundable credit, so if it brings the amount of tax you owe to zero, you can have up to $1,000 refunded to you.
To qualify, the student must be in their first four years of post-secondary education and be enrolled at least half-time. There is no limit on the number of children who can qualify in a given year.
There are also income limits for claiming the AOTC. To claim the full credit, your MAGI must be $80,000 or less ($160,000 if married filing jointly). The credit is phased out for taxpayers with MAGIs between $80,000 and $90,000 ($160,000 to $180,000 for married filing jointly), with no credit available for people with MAGIs greater than those upper limits.
Lifetime Learning Credit
The Lifetime Learning Credit is worth up to $2,000 per return, and you can claim it for an unlimited number of years, as long as you paid for tuition, fees, and required books and supplies at a qualified educational institution.
The student does not have to be working toward a degree program or be enrolled at least half-time.
The credit starts to phase out if your MAGI is between $57,000 and $67,000 ($114,000 and $134,000 for married couples filing jointly). Beyond these upper limits, no credit is available. The Lifetime Learning Credit is not available to married couples who file separate returns.
4. Other Tax Credits for Children
Other tax credits benefit parents directly over the years of a child’s dependency.
Child Tax Credit
The Child Tax Credit is available for each dependent child under the age of 17 who lives with you for more than half the year. The credit is worth up to $2,000 per child, per year. Up to $1,400 of the credit can be refundable.
The credit starts to phase out if your MAGI is greater than $200,000 ($400,000 if married filing jointly). You can read more about claiming the Child Tax Credit in IRS Publication 972.
The Adoption Credit is worth up to a maximum of $13,810 per child on qualified adoption expenses paid to adopt an eligible child. Qualified adoption expenses include:
- Reasonable and necessary adoption fees
- Court costs and attorney fees
- Traveling expenses (including amounts spent on meals and lodging while away from home)
- Other expenses directly related to adopting an eligible child
The credit is not available if you paid these expenses to adopt your spouse’s child.
Although the credit is nonrefundable, if it brings the amount of tax you owe to zero, you can carry forward any excess credit for up to five years. The credit is phased out for taxpayers with MAGIs between $207,140 and $247,140.
Child & Dependent Care Tax Credit
Parents who pay for child care so that they can work can claim the Child and Dependent Care Tax Credit, which is worth 20% to 35% of day care expenses, up to $3,000 for one child or $6,000 for two or more children.
To qualify, the child must be under age 13, or any age and physically or mentally unable to care for themselves.
You can learn more about the Child and Dependent Care Tax Credit in IRS Publication 503.
Earned Income Tax Credit
The Earned Income Tax Credit provides a refundable credit for filers who meet a certain income threshold according to their filing status and the number of qualifying children they have.
For 2019, your earned income and AGI must each be less than:
|Filing Status||Qualifying Children Claimed|
|Zero||One||Two||Three or More|
|Single, Head of Household, or Widowed||$15,570||$41,094||$46,703||$50,162|
|Married Filing Jointly||$21,370||$46,884||$52,493||$55,952|
The maximum credit amounts for the 2019 tax year are as follows:
- $6,557 for three or more qualifying children
- $5,828 for two qualifying children
- $3,526 for one qualifying child
- $529 for no qualifying children
Once you’ve filed your tax return for the year, it’s time to start planning for next year’s return. Tax planning can reduce the total amount of tax you’ll owe through the thoughtful use of deductions, tax credits, and shifting income from high-tax years to lower-tax years.
Here are a few methods you might consider.
Flexible Savings Accounts
If you have access to a flexible spending account (FSA) through your employer, you can use pre-tax dollars to pay for health care or child care expenses.
For 2019, you can contribute up to $2,700 to a health care FSA. Amounts contributed are not subject to federal income tax, Social Security tax, or Medicare tax. The money can also be withdrawn tax-free as long as you use it to pay for qualified medical expenses not covered by your health insurance plan. That includes copays, deductibles, dental services, eyeglasses, and hearing aids.
A dependent care FSA can be used to pay for day care, preschool, summer day camps, and before- and after-school programs. You can contribute up to $5,000 per year to a dependent care FSA ($2,500 per year if married filing separately). The money you contribute is not subject to federal income tax or payroll taxes and can be withdrawn tax-free as long as you use it to pay for qualified dependent care expenses.
The Achieving a Better Life Experience (ABLE) Act allows parents to set aside up to $15,000 each year for the use of a person with disabilities. While contributions to an ABLE account are not tax-deductible on your federal tax return, the savings and investments are allowed to grow tax-free and be withdrawn tax-free, as long as the account holders spend the proceeds on qualified disability-related expenses. Some states do allow you to take a state income tax deduction for ABLE account contributions.
In order to qualify for an ABLE account, the disability must have occurred before the person turned 26 years old.
A Qualified Tuition Plan, often called a 529 Plan after Section 529 of the tax code that authorizes it, allows parents to save money to pay for qualified education expenses.
States, educational institutions, and some financial institutions operate most 529 plans. While you don’t receive any federal tax breaks for contributions to a 529 plan, earnings within the account and withdrawals from the account are not subject to federal income taxes as long as you use the funds for qualified education expenses, such as tuition, fees, books, computer equipment, internet access, and room and board. Many states offer tax breaks for contributions to their state-operated plans.
While 529 plan usage used to be limited to higher education expenses, starting in 2018, you can also use your 529 plan to pay up to $10,000 in annual expenses for tuition at an elementary or secondary public, private, or religious school.
If you don’t have a 529 account set up yet, get started today through CollegeBacker.
Navigating the U.S. tax code can be tedious and frustrating, but with all of the tax deductions and credits available to parents, it’s worth taking the time to research available tax breaks that can increase your tax refund or minimize the amount of tax you’ll owe.
Do you take advantage of any of the tax deductions, credits, or planning opportunities mentioned above? Which ones have been the most valuable for your family?