Day care, diapers and deductions

April 08, 2016 : H&R Block

Are diapers deductible? Is day care deductible?

Raising children can be expensive, as any parent knows. Just outfitting a nursery and stockpiling diapers can really add up. According to a “baby-cost” calculator, parents can expect to spend $72 per month on disposable diapers or $76 per month on a cloth diaper service. And of course, day care is likely to be much more expensive, between $4,000 and $17,000 a year for infants. New parents should make sure they claim all the tax breaks they are eligible to claim, which can help put money in their pocket to cover new expenses.

Here’s what parents need to track to maximize their tax benefits:

How many kids they have and their Social Security numbers

Just by having and supporting a kid, parents can exclude $4,000 per child from their taxable income. That dependent exemption would save someone in the 25 percent tax bracket $1,000. Claiming this exemption is pretty straightforward: parents just need to have a Social Security number (SSN) for their children, or an Individual Tax Identification Number (ITIN) if the child isn’t eligible for a SSN.

Pro tip: Taxpayers may also claim grandchildren, stepchildren, younger siblings and adopted and eligible foster children as dependents. A brief online questionnaire can help taxpayers determine who they can claim.

Parents also may qualify for a child tax credit of up to $1,000 per child. In addition to providing the names and SSNs of their children, the parents will have to meet certain income thresholds. They also won’t be able to use the simplest tax form if they want to claim the child tax credit.

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 of up to $2,100 for their child care expenses. They may claim a credit for 20 to 35 percent of their child care expenses for children under 13. 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 25 percent tax bracket could save $1,250 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 dependent care credit for separate expenses. A tax professional can help parents maximize their child care tax benefits.

How much they earn

It is easier for parents to qualify for the Earned Income Tax Credit (EITC) because the income limitation more than doubles once a taxpayer has a child. So parents who earned $53,267 or less in 2015 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 $6,242 for 2015. 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. Taxpayers can answer a short online questionnaire to help them figure out which expenses they can deduct.

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 and make sound financial decisions should consider meeting with a tax professional to discuss their individual situation.

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