Kids can cost a fortune, whether you're talking diapers or designer jeans. But when tax time rolls around, your progeny can save you hundreds or even thousands of dollars, as long as you know where to look for savings.
The federal tax code offers numerous deductions and credits for parents of dependent children. You may qualify for some or all of the following tax breaks:
The exemption: Parents of dependent children under age 19 (or dependent full-time students under age 24) can claim a $3,400 exemption per child. For a couple in the 25% tax bracket, that exemption could amount to a savings of $850.
The Child Tax Credit: Detailed in IRS Publication 972, the Child Tax Credit offers families that meet certain income requirements a $1,000 credit for each child under 17. Married couples who file taxes jointly are eligible for the full credit if they have income of less than $110,000, as are single filers who earn less than $75,000 and married couples filing separately with income less than $55,000. The credit is phased out above those income limits.Bear in mind that a tax credit is far better than a tax deduction: A $1,000 credit reduces your taxes by a full $1,000, while a $1,000 deduction reduces the amount of income on which you pay tax by $1,000 (resulting in tax savings of between $250 and $350 for most taxpayers).
The Child and Dependent Care Credit: Working parents also can claim a credit for childcare expenses for dependent children under age 13. The credit can cover 20% to 35% of the cost of day care, summer camp, a nanny or nursery school, depending on income.
You can also claim this credit for a spouse or other dependent who is unable to care for himself or herself. Whether you claim the credit for a spouse or child, be sure to include the care provider's Social Security number or tax identification number on your tax return. If you file Form 1040, you claim the credit for child and dependent care expenses using Form 2441. Form 1040A filers claim it on Schedule 2.