As I discussed on Tuesday, raising a child is going to be expensive. You will need accessories like a stroller and a car seat. You may have to find a bigger place or switch school districts. And at the very least, you’re going to have another person to feed, clothe, and entertain.
Luckily, you may be able to recoup some of the extra costs by deducting them on your tax return. Here are the deductions and credits you should keep in mind.
Dependency Exemption: The IRS allows you to exclude a certain amount of your income from tax to cover your basic living expenses. For 2014, that amount is $3,950 for every person claimed on your return. Should you have a child in 2015, you’ll be able to reduce your taxable income by another $4,000. (The exemption adjusts for inflation.) The dependency exemption starts to phase out when your adjusted gross income (AGI) hits a certain level. For instance, in 2015, the phase out starts at $258,250 for individuals and $309,900 for couples filing jointly.
Child Tax Credit: In addition to getting another dependent exemption, you can reduce your overall tax by $1,000 per child under age 17. Unlike the dependency exemption, which only saves you your marginal rate percentage of the expense in actual tax, the tax credit reduces your tax dollar for dollar. For example, if you file Married Filing Jointly in 2014 with taxable income of $80,000, the $3,950 dependent exemption saves you $988 ($3950 * 25% marginal bracket). However, the $1000 child tax credit actual saves you $1000. The other cool thing about this credit is that if you don’t owe any tax, you can still get the $1000 refunded to you. Like the dependency exemption, the child tax credit phases out. Your income must be below $110,000 for married couples filing jointly, $75,000 for single and head of household, and $55,000 for a person married filing separately.
Child and Dependent Care Credit: Another useful dollar-for-dollar credit, is the Child and Dependent Care Credit. You can claim this credit if your child is under 13 and you pay for childcare while you are working or actively seeking work. Nursery school, private kindergarten, after school programs, and day care all qualify as allowable expenses. The credit allows you 20-35% (depending on your income) of $3000 in expenses for one child and $6000 in expenses for two or more children. However, you can’t take this credit if you’re married filing separately.
Adoption Credit: For 2014, this credit allows you to reduce your total tax (again, dollar for dollar) up to $13,190 per child. You get to deduct any qualified adoption expenses paid to adopt an eligible child including 1) reasonable and necessary adoption fees, 2) court costs and attorneys fees, 3) traveling expense, and 4) any other expenses directly related to and for the principal purpose of legal adoption. However, you shouldn’t include expense reimbursed by your employer. As with the other credits and deductions I discussed, income limitations exist. For 2014, your Modified Adjusted Gross Income needs to be under $237,880, with the phase out beginning at $197,880. In addition to the large amount of the credit, if you adopt a child that is determined to have special needs, you can take the maximum amount of the credit, regardless of what you actually spent on qualified adoption expenses. Unfortunately, this credit is nonrefundable. In other words, you can’t get it back after you’ve reduced your tax liability to zero.
Earned Income Tax Credit: The earned income tax credit was created to help low and moderate income working people. Unlike the adoption credit, the EITC is refundable and could mean thousands of extra dollars if you qualify. The amount you get for the credit is based of your income and family size. For instance, If you’re married filing jointly in 2014, the maximum credit is:
- $6,143 with three or more qualifying children
- $5,460 with two qualifying children
- $3,305 with one qualifying child
Keep in mind, you must have earned income to claim the credit, and you cannot take it if you file married filing separately.
If you want more information on these deductions and credits, I’ve attached the corresponding IRS publication in each heading. While it’s true that these adjustments and credits won’t save you all of the money that you will put out for your child, they should put good a good chuck of change back in your pocket for expenditures you would likely make otherwise.