Sarah J. Fischer, CPA
Grand Junction Office
From the moment you take your newborn baby home, to the time you help them out of the nest, there will be numerous costs you will incur in the 20-something years in between. The U.S. Department of Agriculture says it costs the average middle-income family in the United States approximately $304,500 to raise a child born today. This figure does not include college, so this is simply the everyday costs to house, feed, clothe and pay for child care.
For most, the joy children bring to our lives and families are priceless – however, it still is nice to have some “breaks” along the way.
Some of the most popular tax incentives available to U.S. parents with qualifying children include: dependency exemptions, more beneficial filing status, the Child Tax Credit, the Federal Adoption Tax Credit, and the Child and Dependent Care Credit.
Filing Status changes
Married couples who have a child will not change their filing status (Married Filing Joint). But, if you are single, having a child may allow you to file as head of household rather than single. The benefit of filing head of household is a larger standard deduction and better tax brackets.
Dependency Exemptions
Personal exemptions are available to taxpayers to reduce taxable income. When you add a member to your family you can claim an additional personal exemption to your income tax return, also called the “dependency exemption”. This is an additional deduction (i.e. reduction of taxable income) on your tax return until the child turns 19.
Child Tax Credits
In addition to increased dependency exemptions there is the Child Tax Credit which is a federal tax credit for low and moderate income working people raising children. The credit is up to $1,000 per child and is available to parents until your child reaches age 16.
If gross income is less than $110,000 for a married couple ($75,000 for a single parent) the credit is the full $1,000 per child. However, once income goes above this amount it starts to phase out. For some lower-income families the credit will be “refundable” meaning if the credit exceeds your tax liability the government will issue you a refund check for the difference, this is also known as the “Additional Child Tax Credit”.
Child and Dependent Care Credits
Taxpayers can claim a nonrefundable credit for a percentage of their dependent care expenses they incur in order to allow them to work. These allowable expenses are capped at $3.000 for one child and $6.000 for two or more. Allowable expenses cannot be greater than earned income. The amount of the credit is between 20-35% of the allowable expenses, depending on gross income limits. Those with lower adjusted gross income get the higher percentage and anyone over $43.000 of AGI gets 20%. So, this particular credit is available even for high-income taxpayers.
Many employers also offer child-care reimbursement plans at work. These are often part of a flex spending plan and employees can use them to pay for child care pre-tax and thus reduce their gross taxable income to help pay for child care costs up to a certain amount each year. Of course the IRS does not allow you to “double-dip” by claiming a credit AND contribute to a flex spending plan tax free – so it is a one or the other. However, usually the savings of taxes on the diverted income outweighs the benefit of any credits. Also most of these employer reimbursement accounts are use-it-or-lose-it so it will take careful planning to reap the benefit.
Adoption Credits
A tax credit is available for the qualifying costs incurred in adopting an eligible child. The credit is non-refundable, however any credit you do not use can be carried forward for up to five years. Also, some employers may offer exclusions from income for any employer-provided adoption assistance. The credit or exclusion from income are based on qualified adoption expenses the taxpayer incurred in connection with the adoption. There are income limits on who can claim the credit. The credit and exclusion are phased out for taxpayers with Adjusted Gross Income between $201,010 and $241,010 (2015) Also the maximum dollar amount or the credit or exclusion is $13,400 (2015) per child.
One note, the Adoption Credit can become complicated in scenarios of divorce, foreign and special need adoptions, non-U.S. citizens and joint custody situations. Make sure to consult with your tax advisor in these instances.
Be sure to take advantage of as many of the above credits as you qualify for – they can provide a favorable advantage for families. In addition, there are many sophisticated tax planning strategies to consider when your children have investment income, earned income or you own your own business. Consider discussing the matters with professionals to ensure you reduce your tax burden when possible.
Sarah Fischer, CPA, is a tax manager specializing in tax planning and preparation services for individuals, and private companies for clients in several industries including auto dealerships, construction, manufacturing and medical practices. She is a member of American Institute of CPAs, Colorado Society of CPAs, and local nonprofit Junior Service League.
