As any parent knows, having kids adds whole new layers of expenses to your life, from child care to sippy cups. Fortunately, there are up to five different tax credits that can help you offset these expenses.
Child Tax Credit
You can get a child tax credit of $1,000 per qualifying child under age 17. That’s one for each of whom you can claim a dependency exemption. Your son, daughter, stepchild, adopted child, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them might all qualify—for example, your grandchild, niece, or nephew.
The child tax credit was created for low- and middle-income taxpayers. Thus, the credit is limited if your modified adjusted gross income is above a certain amount. The amount at which this phase-out begins varies depending on your filing status. For married taxpayers filing a joint return, the phase-out begins at $110,000. For married taxpayers filing a separate return, it begins at $55,000. For all other taxpayers, the phase-out begins at $75,000. In addition, the child tax credit is generally limited by the amount of the income tax you owe as well as any alternative minimum tax you owe.
Child and Dependent Care Tax Credit
Unlike the child tax credit (which you get simply by having a qualifying child), you can use the child and dependent care credit only if your reason for spending money for child care is to allow you (and your spouse, if you’re married) to work. Although there’s no income ceiling on this credit, people with higher incomes get a smaller credit than those with more modest incomes.
You qualify for the credit if:
- You have a qualifying child or other dependent under the age of 13, or you have a child over 13 who is totally and permanently disabled.
- You incur child care expenses so that you and your spouse, if any, can earn income.
- You and your spouse file a joint tax return (if you’re married).
- You and your spouse, if any, both work either full- or part-time, unless you or your spouse is a full-time student or disabled. (Looking for work counts as being employed.)
Adoption Tax Credit
People who adopt a child in 2012 are entitled to a tax credit of 100% of their adoption expenses up to a maximum of $12,650 per child. Under the fiscal cliff tax deal enacted on January 1, 2013, the adoption tax credit was made permanent. For more information, see Do You Qualify for the Adoption Tax Credit?
American Opportunity Tax Credit
The American Opportunity Tax Credit (formerly called Hope tax credit) is designed to help low-and middle-income taxpayers pay tuition for the first two years of higher education. You can claim the credit for tuition and related fees you pay an accredited college, university, vocational school, or other educational institution eligible to participate in the federal student aid program.
The payments must be made on behalf of an eligible student, who could be any dependent child or children, your spouse, you, or any other dependents for whom you claim tax exemptions. The student must be in the first or second year of school, attending school at least half-time, and enrolled in the program to obtain a degree or other credential. Like the child-tax credits discussed above, the American Opportunity Tax Credit is subject to an income threshold—if you earn over a certain amount, say goodbye to the credit.
The amount of the credit is the sum of:
- 100% of the first $1,200 of education expenses you pay for the eligible student, plus
- 50% of the next $1,200 of education expenses you pay for that student.
That adds up to a maximum credit per eligible student of $1,800, assuming you paid at least $2,400 in education expenses. However, the full credit is available only to taxpayers whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels.
Under the tax deal enacted on January 1, 2013, this credit which was scheduled to expire at the end of 2012 was extended for five years.