Taxes are tough – especially for parents with little dependents. Whether you're a new parent or just had another kid, there are a few things you should know about tax credits and deductions. For starters, tax credits, according to the IRS, reduce the amount of income tax you have to pay, while a deduction reduces lowers your taxable income.
To give you a hand during the tax season home stretch, we chatted with Denise Scally, a certified public accountant in southeast Michigan, to get 10 tips for parents when it comes to filing by April 15.
Tips for families with younger kids
They may be little, but they are costly! With tykes, there a few things to know about deductions.
There is a "child tax credit" you'll want to explore. It deducts $1,000 from your tax bill every year per qualifying child. However, the total amount deducted can't exceed your tax liability. Also, this credit may phase out if your combined income exceeds $110,000, if you are married or make $55,000 if you file separately.
"The child tax credit expires the year your child turns 17," Scally says. "That $1,000 credit can be a big difference in someone's tax liability."
How can you take advantage of this? "You want to remember that if you have two parents working, you can deduct the child care costs," Scally says.
Another way is if one parent is a full-time student. Also, this credit deduction includes day camps – though not sleep-away camps, and only applies if your child is under the age of 13.
If you'd had a child this year – even if you gave birth on Dec. 31 – you can receive a full year deduction, Scally notes.
Ah, college. The student loans, the extra expenses … the tax credits? If you sent your kid off for higher education this year, there are two credits to know about, which could reduce the taxes you owe.
If you made payments on a qualified student loan for you or another college student in your immediate family, you can deduct the interest paid on that loan. This, according to TaxSlayer.com, is known as the "American opportunity credit" – and has been extended through the 2017 tax year.
"Parents can get up to $2,500 of credits for their child's higher education costs, available for the first four years that they're in school," Scally says.
The "lifetime learning credit" is another route to explore, which gives you up to $2,000. Unlike the American opportunity credit, there is no limit on the number of years for you to claim the lifetime learning credit.
You can qualify for either of these credits if you paid for college costs for an immediate family member. You may only elect one of these credits per year.
Other tax information
Scally provides a few other tax tips for parents:
- Child support payments officially established under a divorce decree are tax free to the recipient.
- If you adopted a child, some of the adoption expenses may be eligible for a tax credit.
- Parents who are self-employed and pay for health insurance may be able to deduct the premiums paid to cover your child under the age of 27, even if they're not a dependent.