Use Exemptions to Your Favor
After having a child, you’re allowed to claim them as a dependent on your taxes to receive an extra exemption. This can help reduce your AGI, or adjusted gross income. The government uses your AGI to determine how much you owe, therefore, the lower your income (after exemptions), the lower your tax bill. There are limitations to this, but most can look to save thousands of dollars. Siphon those saved dollars into a college savings account and you’ll be amazed at the difference it makes in paying for your child’s upcoming educational career.
In the Case of Adoption
Perhaps you’re adopting a child. This process is not an inexpensive one, but the IRS recognizes these costly expenses by offering the opportunity to claim these expenses on your income taxes. Last year, any adoptions completed in 2015 allowed a federal adoption tax credit of up to a $13,400 per child. The amount you receive depends on your income. If you and your spouse make less than $291,919, you’re eligible. However, there are limitations. Because this is a tax credit, it isn’t refundable. That means you must owe the federal government some type of income tax, and you won’t be paid out the extra money left over, if any. The adopted child cannot be a stepchild, and they must be under the age of 18 or unable to take care of themselves to qualify.
Child Tax Credit
This refundable credit is designed to reduce the taxes you’re liable for, and can be awarded in amounts up to $1,000 per child. The amount of the credit awarded depends on income and the number of children living in your home. If you claim singly or as the head of the household, you’re ineligible for this credit if you make above $75,000. If you’re married, filing jointly, you must make less than $110,000 to qualify. If you’re confused about what will best work in your financial favor, speak with a professional who can help you determine your filing status.
When it Comes to College
If your child is already in college, take advantage of the American Opportunity Credit. This credit covers certain expenses associated with the first four years of college. There are regulations about how and who qualifies for this tax credit: your child must be in pursuit of a credential or a degree, and must be enrolled as a half-time student at least for tax year. They must also have no felony drug convictions on their record. For each student, the maximum credit you can procure annually is $2,500.
You should also keep the Lifetime Learning Credit in mind. This can help cover undergraduate costs for a student that does not qualify for the American Opportunity Credit, whether that be because they have a limited course load (are enrolled in school less than half-time status) or they’ve already completed their first four years of college credit. This credit can cover expenses including tuition and enrollment fees, along with books and course materials.
Child Care Credit
If you work full time and you must enroll your child in day care, most of those expenses are deductible on your income taxes. This is a nonrefundable tax credit. In order to qualify for the Child Care Credit, you must show proof of payment to a licensed childcare provider while you’re working or in search of employment. The child must be under 13 years old, and you cannot claim this credit if you’re married, but filing separately. This credit can award more than $3,000 per child per year.
The ins and outs of the tax process become more convoluted after having a child. If you’re unsure about which credits and exemptions you qualify for, don’t be afraid to talk with a professional to discover how you can get on the right financial foot- there are probably more than you think!