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Tax Breaks for Parents

Raising a child is expensive, but you can partially offset some of the expenses by utilizing tax deductions and tax credits that are available to you as a parent.

Most of the deductions and credits are available in full for the year the child is born. If you just had a child on December 31st – Congratulations! You are immediately eligible for tax breaks such as the Child Tax Credit and the Earned Income Credit (EITC), as well as a dependent exemption.

If you are a new parent, you will want to get a Social Security Number (SSN) for your child as soon as possible.  Make sure your child’s name is spelled correctly on the Social Security card – if their name is misspelled, it can cause your tax return to be rejected by the IRS.

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Here are 5 of the most common tax breaks available to parents:

Tax Exemptions for Dependents

You are allowed to claim an exemption for each child who lives with you and qualifies as your dependent. Similar to a tax deduction, a dependent exemption reduces your taxable income.

In order to qualify as your dependent, the child must be under age 19 at the end of the year (or under age 24 if they’re a student) and younger than you.

For tax year 2014, the dependent exemption is worth $3,950.

For more information, please see Pages 11-23 of IRS Publication 501 (Exemptions, Standard Deduction, and Filing Information).

Child Tax Credit

For most parents, the child tax credit is the single biggest tax break they will receive for having a child. In order to be eligible for this credit, your child must be under age 17 at the end of the tax year. If they are, you can receive a credit worth up to $1,000 for each qualifying child.

If you are not able to take full advantage of the child tax credit because you do not owe enough tax, then you may also be eligible for the Additional Child Tax Credit.

For more information, please see IRS Publication 972 (Child Tax Credit).

Child and Dependent Care Tax Credit

Parents who are caring for qualified dependents may be eligible for the child and dependent care credit. For the purposes of this tax credit, the child must be under age 13 and live with you for at least half the year.

If you bring your child to daycare so that you can work, you can claim a credit for up to 35% of your childcare expenses. The dollar limit on the amount of expenses you can claim is $3,000 for one qualifying child (or $6,000 for two or more qualifying children).

Note that the cost of a babysitter doesn’t count as an expense if they were hired so you could have a night out. However, babysitter costs are eligible for this tax credit if they were incurred because you had to work.

If you want to claim the child and dependent care credit, you need to make sure that you obtain the Social Security Number(s) or Tax ID of your babysitter(s) or the daycare.

For more information, please see IRS Publication 503 (Child and Dependent Care Expenses).

‘Head of Household’ Filing Status

If you are a single parent, you may be eligible to file as ‘head of household’ (rather than ‘single’) if you have at least one qualifying person living with you.

There are three main criteria for the head of household filing status. First, you must be unmarried as of the last day of the year. Second, you must pay for over half the cost of maintaining a home for the year. Third, a qualifying person must live with you for more than half the year. (A qualifying person can be your child or relative who meets the IRS guidelines.)

Filing as head of household (instead of single) has two major benefits. The standard deduction amount is higher for head of household filers – for tax year 2014, the standard deduction is $9,100 for head of household ($6,200 for single filers). The head of household status also comes with higher income limits for various tax breaks, such as the Child Tax Credit.

For more information, please see Pages 6-11 of IRS Publication 501 (Exemptions, Standard Deduction, and Filing Information).

Earned Income Tax Credit

The Earned Income Tax Credit (EITC or EIC) is a refundable tax credit designed to assist low-income working families. For tax year 2014, this credit is worth a maximum of $3,305 if you have one qualifying child (up to $6,143 maximum for three or more qualifying children).

In order to claim the earned income credit, you must file Schedule EIC with your income tax return (Form 1040 or Form 1040A only). Make sure that you actually qualify for this tax break because the IRS imposes severe penalties on people who falsely claim the EIC (such as making the credit unavailable to you in future years, even if you’re eligible).

You can use the IRS online tool, the EITC Assistant, to find out if you qualify.

For more information, please see IRS Publication 596 (Earned Income Credit (EIC)).

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