Little bundles of joy and even those wonderful teenagers you have come with a whole host of tax deductions. For the savvy parent, it's all an opportunity to send Uncle Sam a little less this year.
Whether you have one child or a whole brood, there are three really important tax benefits that every parent should take advantage of:
- Dependency exemption
- Child Tax Credit
- Expenses for child care
There are also education benefits to help defray the cost of higher education.
“The first one to know about is the American Opportunity Credit which is for the first four years of higher education. It can be up to $2,500 and that's per student,” said Katherine Pickering, the Executive Director of The Tax Institute at H&R Block. So if you have more than one child in college--this credit is good for multiples.
“There's also a lifetime learning credit and that can be up to $2,000,” said Pickering. The Lifetime Learning Credit works for those pursuing job enhancing skills. Courses must be taken at an eligible educational institution but there is no limit on the number of years you can claim the credit.
Then there is the tuition and fees deduction which can reduce your taxable income by up to $4,000. It's important to understand which higher education expenses are eligible and which are not. Things like tuition and books are ok. But paying for that plane ticket to send your child home is not allowed.
If you're adopting a child, you can claim up to $13,000 in expenses in the year you incur the costs, even if the adoption is finalized the following year. And if that child has special needs, you're eligible for the full amount even if you didn't spend that much.
Did you know one in five families that qualify for the Earned Income Tax Credit don't claim it? It's a rich benefit that can make a big difference.
Another idea for working parents is to find out if your employer offers a Flexible Spending Account for childcare which can be good for up to $5,000 pre-tax. But keep in mind, you can't double dip. Pay for childcare from that flex account and deduct those expenses.