Tax Impact of Having Children
There are numerous tax advantages to having children that the IRS has provided. If you have children you can begin claiming them as dependents the year they are born. This immediate tax deduction helps offset some of the additional expenses you will face as a parent. There are other credits and deductions to consider too.
The Child Tax Credit is available for dependents up until the age 17. And once you have received the full benefit of the Child Tax Credit you can file for the Additional Child Tax Credit. This Additional Child Tax Credit is refundable, meaning it can create a refund were one was not available before. The Adoptive Credit is for expenses you might incur while adopting a child.
The Earned Income Credit is affected by the number of children you have in addition to your income. This refundable credit is for those working but earning below the poverty line. Check with your tax professional if you think you might be eligible.
If someone watches your 13 year old or younger child while you seek work or are working, the Dependent Care Credit can offset these expenses. And many employers offer a cafeteria plan that allows pretax dollars to be collected for the payment of such care costs. This allows you to gain the benefit long before you file your taxes.
Earned income for your child can be refunded at times. If you child works, he or she could be eligible for a refund of taxes paid. Make sure to complete a return for all working children to claim this refund. But watch out for the Kiddie Tax if your child has a large amount of investment income, as it might be taxed at the parent’s tax rate.
And finally paying for school can create tax credits. The Coverdell Education Savings Account is a great way to save tax free for education. There also exists two higher education credits that can refund your college expenses making higher education affordable. Plus the college loan interest deductions are available which many prior students continue to take years after completing their degrees.