Can Having Kids Be Beneficial For Taxes? Yes!
We all know that having kids is expensive. Food, school, clothes, toys, a larger home, extra-curricular activities, it never ends. Fortunately, there are various tax credits available to help ease this financial burden. These tax credits can either reduce the amount of tax you owe, increase your refund, or both, depending on your situation and the credit. Whether you’re a new parent or a seasoned one, understanding these credits is essential to getting the most out of your tax return.
What Exactly Are Tax Credits?
Before diving into the specific tax credits available for families with children, let’s first define what tax credits are. A tax credit is simply an amount of money that taxpayers can subtract directly from the taxes they owe to the government (we’ll focus on the IRS for this post). Credits are different from tax deductions. A tax deduction reduces the amount of income that is subject to tax. Good so far?
Tax credits can either be nonrefundable or refundable:
- Nonrefundable Tax Credits can reduce your tax liability to zero, but not below that. In other words, if your tax due is lower than the amount of your credit, you lose the remaining amount. Bummer.
- Refundable Tax Credits can reduce your tax liability to zero, and if the credit exceeds the tax you owe, the IRS will refund the difference.
Now, let’s take a look at some of the major tax credits available for folks with children.
1. The Child Tax Credit (CTC)
The Child Tax Credit (CTC) is one of the most significant tax credits for parents. It provides financial relief to those with qualifying children under the age of 17. For tax year 2025, the CTC can be worth up to $2,000 per eligible child, with up to $1,700 being refundable if you don’t owe taxes (the refundable portion is known as the Additional Child Tax Credit or ACTC).
To qualify for the full credit, the following criteria must be met:
- The child must be under 17 years old at the end of the tax year.
- The child must be a U.S. citizen, national, or resident alien.
- The child must live with the taxpayer for more than half of the year.
- The taxpayer must meet certain income thresholds. For the CTC, the phase-out begins at $200,000 for single filers or $400,000 for married couples filing jointly.
2. The Child and Dependent Care Credit
Parents who pay for child care while they work or look for work may be eligible for the Child and Dependent Care Credit. This credit helps offset the cost of care for children under 13, as well as care for spouses or dependents who are unable to care for themselves.
The credit is based on a percentage of your qualifying expenses. The percentage ranges from 20% to 35% depending on your income. The maximum amount of qualifying expenses for two or more children is $6,000 ($3,000 for one child), so the maximum credit you can claim is $2,100 for two or more children ($1,050 for one).
To claim the credit, the care must have been provided by a qualified caregiver or child care facility. Additionally, both parents (if married) must be working, attending school, or looking for work, and the care must allow you to work or seek employment.
3. The Earned Income Tax Credit (EITC)
The Earned Income Tax Credit (EITC) isn’t specifically for families with children, but it can be a huge benefit for low- to moderate-income families. The EITC is a refundable credit for those who have earned income, and the amount received depends on how many children the taxpayer has.
Eligibility for the EITC depends on income, filing status, and the number of qualifying children with the maximum credit being over $6,000 for families with three or more children.
In addition to having children, you must meet other requirements, such as:
- Earning income through employment or self-employment.
- Having a valid Social Security number.
- Being a U.S. citizen or resident alien.
- Filing jointly if married, and meeting income limits that vary depending on your filing status.
The EITC can significantly reduce the amount of taxes owed for low-to-moderate income taxpayers or result in a refund.
4. The Adoption Credit
Adopting a child can be a life-changing experience, but it also involves significant costs. Fortunately, the Adoption Credit helps offset these expenses. This tax credit covers up to $15,950 (as of 2024) in qualified adoption expenses, including adoption fees, attorney fees, court costs, and travel expenses.
The adoption credit is nonrefundable, meaning that it can reduce your tax liability to zero, but if the credit exceeds the amount of taxes you owe, you won’t receive a refund for the difference. However, if the credit exceeds your tax liability, you may be able to carry over the unused portion of the credit to future tax years.
The credit applies to both domestic and international adoptions, as well as the adoption of children with special needs. Eligibility for the adoption credit depends on your income, with the credit phasing out at higher income levels.
5. The Child and Dependent Care Flexible Spending Account (FSA)
While not technically a tax credit, a Child and Dependent Care Flexible Spending Account (FSA) is another valuable way to save money on child care costs. FSAs allow you to set aside pre-tax dollars to pay for eligible child care expenses, which can help reduce your taxable income and, in turn, lower your tax liability.
In 2024, the contribution limit for a Dependent Care FSA is $5,000 per year for individuals or married couples filing jointly, or $2,500 if married and filing separately. You can use FSA funds for child care, babysitters, and other qualified expenses. The savings can be significant since you’re using pre-tax dollars for these costs.
Honorable Mention: 529 Education Savings Plans
We’ll cover these in a separate post. 529 College Savings Plans themselves are not directly tax credits and they aren’t deductible on your federal taxes, but the earnings grow tax-free, and qualified withdrawals for educational expenses are also tax-free. As icing on the cake, some states offer tax deductions or credits for contributions to a 529 plan. DC, MD, and VA each offer such benefits. Whoo hoo!
529 Plans can be an excellent way to start saving for your child’s future while also reducing your taxable income, and even more beneficial depending on where you live.
How to Maximize Your Tax Credits for Children
To get the most out of the tax credits available to you, here are a few tips:
- Keep Good Records: Track all expenses related to child care, medical care, education, and adoption, as these can all be used to claim credits.
- File on Time: Make sure to file your tax return on time to avoid penalties that may eat into your tax credits.
- .Consult a Tax Professional: If you have complex tax situations, especially regarding adoption or self-employment, a tax professional can ensure you’re taking advantage of all the credits available to you.
Conclusion
Children are expensive, but with the right knowledge of available tax credits, you can reduce the financial burden. The Child Tax Credit, Dependent Care Credit, Earned Income Tax Credit, and adoption credits are just some of the ways the IRS provides some support to families.
If you need assistance navigating the complexities of tax credits, let me know!
*Please note, all the information presented here is strictly for educational purposes and does not constitute tax or legal advice.
