4 Tax Credits That Can Save Parents Big Money
Your kids might get you a little extra pocket change come tax refund time. Here’s what parents need to know about the 2020 Child Tax Credit, plus three other credits that could help you save.
Kids cost money, it's just a fact. All year long parents are shelling out cash for everything from field trips to new shoes to that special, must-have birthday gift. But at tax time, something surprising can happen—parents can actually get some cash because of the kids thanks to tax credits.
The best part about tax credits, or credits toward your overall tax owed, is that they are a dollar-for-dollar reduction. If your tax liability is $2,000 and you qualify for $2,000 in credits, your tax bill drops to zero. Credits are different from deductions though many people use the terms interchangeably. Deductions are dollar amounts subtracted from your adjusted gross, also called taxable, income. Deductions reduce the amount of income you are taxed on, while credits reduce the actual tax. (You can read more about deductions here!)
Here are the top tax credits that are available for parents and families that can make quite a difference in your overall tax liability.
Child Tax Credit
The Child Tax Credit is a biggie. It allows a credit of up to $2000 per child. The CTC replaced child deductions in 2018 after sweeping tax code rewrites. T0 take advantage of the Child Tax Credit, you and your children must meet the following criteria:
- Age: Child must be 17 years old or younger
- Relationship: Child must be your own child (either biological or adopted), a step-child, or a foster child placed with you by a qualified agency.
- Financial support: You must have provided at least half of the child's financial support over the course of the tax year.
- Dependent: You must claim the child as a dependent on your taxes.
- Citizenship: The child must be a U.S. citizen, national, or resident alien.
- Residence: The child must have lived with you for at least half the year.
- Family Income: You must have a modified adjusted gross income of less than $200,000 as a single filer or $400,000 if filing jointly with a spouse.
Also, according to Michigan-based tax attorney and CPA Chelsea Rebeck, this credit could net you a refund! "For tax years 2018-2025, the maximum refundable portion of the credit is $1,400 (equal to 15 percent of earned income above $2,500). If your tax is $0 and your total earned income is at least $2,500, you can claim the refundable part of the credit."
Child and Dependent Care Credit
If you send your young child to daycare or after-school care, you know those prices are no joke. But, good news, the IRS says you might be eligible to get up to 35 percent of those costs back by claiming the Child and Dependent Care Credit. The credit maxes at $3,000 for one child or $6,000 for two or more. You can qualify for the credit if you (if filing single) and your spouse (if filing jointly) put your child in care to allow you to work, look for work, or attend school full time. You both must also have earned income for the year to qualify.
Earned Income Tax Credit
The Earned Income Tax Credit (EITC) is a tax credit that benefits low- and middle-income filers and those with children tend to get a higher credit than those without. "If you are below certain income thresholds (all of which are sub $60K for joint filers) you can qualify for the Earned Income Tax Credit," explains tax attorney Shann Chaudhry. "The EITC is for low income working people, to help offset costs. The EITC is refundable 100 percent. So if you received a credit in excess of what you owe, you might get a refund." To qualify you must earn less than $55,952 if filing jointly or less than $50,162 for single filers. The credit increases for each child but tops out at three kids. The most you can receive is $6,557 subtracted from your total tax bill. And, if the credit brings your liability down to zero but there's still money left over in the credit, it could push you over into refund territory!
American Opportunity Tax Credit
Parents of college students, this one's for you! The American Opportunity Tax Credit (AOTC) is for qualifying education expenses for the first four years of higher education. According to the IRS, to qualify for this credit the dependent student and parents must meet the following requirements:
- Be pursuing a degree or other recognized education credential
- Be enrolled at least half time for at least one academic period* beginning in the tax year
- Not have finished the first four years of higher education at the beginning of the tax year
- Not have claimed the AOTC or the former Hope credit for more than four tax years
- Not have a felony drug conviction at the end of the tax year
There are also income limitations to qualify: Filers' adjusted gross income cannot exceed $80,000 if filing single or $160,000 if filing jointly. There are also documentation requirements that the IRS looks at very closely, so be doubly sure you qualify for this one before filing. If you do, it can save you big bucks. You can get 100 percent of the first $2,000 of qualified education costs then 25 percent of any additional qualifying expenses. The maximum credit is $2,500 per year per student.