Children are expensive. The U.S. Department of Agriculture reported that parents in middle-income families can expect to spend $235,000 to raise a child to age 17. The study considers the cost of food, shelter and other necessities, but does not factor in inflation or the cost of a college education after age 17.
Fortunately, the government is here to help. The tax code provides numerous credits and deductions to offset some of the cost. Tax credits are more valuable than deductions because they reduce your tax bill directly. The child tax credit is $1,000 in 2012 for each child under 17 years old. The dependent deduction is $3,800 per child under age 19 (or 24 if the child is a full-time student). Parents in the 15 percent tax bracket save $570 in taxes for the deduction and $1,000 in taxes for the credit. Here are other beneficial tax credits to keep in mind.
Child and Dependent Care Credits
These can be taken if you pay someone to care for your child so you or your spouse can work. You can claim expenses like daycare up to $3,000 for one child and $6,000 for two or more children. Keep accurate records of all childcare expenses to ensure you receive the maximum tax benefit. The credit is up to 35 percent of qualifying expenses depending on your adjusted gross income (AGI). Preschool and nursery school costs count as childcare expenses for this credit.
Adoption Tax Credit
If you adopted a child in 2012, you may be eligible to claim this credit to help offset the cost. The amount of tax credit you qualify for is directly related to how much money you spent on adoption-related expenses. It is limited by your modified adjusted gross income. Adoptive parents can claim a credit up to $12,650 to cover qualifying expenses.
Earned Income Tax Credit (EITC)
The EITC is a credit for working parents with qualifying dependent children. The amount of the credit is based on the number of dependent children and your AGI. The maximum credit in 2012 is $5,891. The EITC is a refundable tax credit, meaning it can even generate a tax refund larger than the amount of tax paid in through withholding.
Higher Education Credits
The tax code contains numerous credits to offset education costs. The Hope Learning Credit is $2,500 in 2012, the Lifetime Learning Credit has a maximum credit of $2,000, and the Student Loan Interest Deduction maxes out at $2,500. All of these credits can be limited by your AGI. You should review the IRS Publication 970, Tax Benefits for Education, for details on which credits may apply in your situation.
This credit is used to encourage saving for retirement. However, it can also work well for college savings when a Roth IRA is used. The credit can be up to 50 percent of the first $2,000 contributed to a retirement account, such as a 401(k), Roth IRA 403(b) or a Traditional IRA. A good strategy for using the saver’s credit is having the grandparents contribute to a retirement account for the parents. The contribution can be used for college expenses in the future, and the parents get the tax credit today.
Another tax tip is to get a Social Security number for your newborn. You can’t claim the tax credits or deductions without it. You will most likely need the number to obtain medical coverage for your child, as well.
Also keep in mind that medical expense deductions are often missed by new parents because the birth of a child may be the first time they qualify for such deductions. Any non-reimbursed medical expense for prenatal care, delivery, well-baby checkups and the like can be deducted when total costs exceed 7½ percent of your AGI. Don’t forget travel costs to and from the doctor and any expenses for childbirth classes. Class fees are considered a medical expense for purposes of the deduction.
Although tax credits and deductions won’t completely offset the cost of raising a child, they can be a big help. Make sure you take advantage of everything the government offers before filing in April.