Benefits like child care credit make parenthood less taxing, literally
Are diapers tax deductible? Is child care tax deductible?
Raising children can be expensive, as any parent knows. The USDA estimates just one child under the age of one can cost more than $16,000 a year. Parents should make sure they claim all the tax breaks they are eligible to claim, like the child and dependent care credit, which can reduce their taxes to help them cover other expenses.
Here’s what parents need to track to maximize their tax benefits:
Their kids’ Social Security numbers
Children under the age of 17 may qualify for a child tax credit of up to $2,000. Each child must have a valid Social Security number (SSN) in order to claim the credit. The credit is refundable up to $1,400 for taxpayers with earned income of at least $2,500.
Children who do not have an SSN or who are 17 or older can qualify for the $500 credit for other dependents. Their parents will need the child’s individual tax identification number (ITIN) to claim the credit.
Both the child tax credit and credit for other dependents phase out (reduce) for taxpayers with adjusted gross income of $200,000 ($400,000 for married taxpayers filing jointly).
Pro tip: People can claim the credit for other dependents, not just their older kids. For example, they may be able to claim this credit for their own parents if their parents are their tax dependents.
How much they spend on child care
If parents are working or looking for work, they could be eligible to claim the child and dependent care credit for their child care expenses. They may claim a credit for 20 to 35 percent of their child care expenses for children under 13. The maximum credit is $1,050 for one child or up to $2,100 for two or more children. Expenses for child care at day care facilities, in-home centers, before- and after-school programs or from a nanny or babysitter – even day camp – could qualify.
Parents should also check what benefits their employers offer. An employer-sponsored dependent care Flexible Spending Account (FSA) allows the parent to save up to $5,000 pretax to use toward child care expenses. This means parents in the 24 percent tax bracket could save $1,200 by fully funding their FSA.
Because the parents cannot “double dip” and use funds from their dependent care FSA to qualify for the child care credit, they may have to choose between tax benefits. Their income and expenses will likely determine which tax benefit will maximize their savings.
Pro tip: Although parents cannot “double dip,” they may be able to use both the FSA and child and dependent care credit for separate expenses. For example, if a parent has two or more children and spend at least $6,000, they can put $5,000 in their FSA and use the remaining $1,000 for the child care credit. A tax professional can help parents maximize their child care tax benefits. Also, tax benefits for care are available for other dependents, such as dependent parents who require day care while the taxpayers work.
How much they earn
It is easier for parents to qualify for the Earned Income Tax Credit (EITC) than it is for taxpayers who do not have children. That is because the income limitation more than doubles once a taxpayer has a child. So parents who earned $54,884 or less in 2018 should check if they qualify for the EITC. Depending on taxpayers’ filing status, income and how many qualifying children they have, it can be worth up to $6,431 for 2018. And because the EITC is a refundable credit, an eligible person can still get the credit even if they do not owe and have not paid income taxes.
How much they spend on medical expenses
The bills from all those doctor visits, trips to the emergency room, prescriptions and other medical expenses for themselves and their children can add up. If those expenses get high enough – more than 10 percent of their adjusted gross income – parents may even be able to deduct some of those costs for a tax benefit. The 10 percent threshold may be difficult to reach, especially because they cannot include any expenses that were paid or reimbursed by health insurance or a health savings account (HSA).
Pro tip: Parents may have an easier time reaching the 10 percent threshold if they are familiar with all the qualifying expenses they may claim. Medical equipment, like breast pumps and lactation supplies, eyeglasses and transportation costs to and from medical care facilities are eligible expenses. However, diapers are not deductible unless they are needed for a specific medical condition.
When big changes – good, bad, happy and sad – happen in life there are often big tax changes to consider. Parents who want to better understand their tax outlook to help them make sound financial decisions should consider meeting with a tax professional to discuss their individual situation.