Happy Parents’ Day to all the families in the eSmart Tax
Community! Knowing about credits and
deductions for parents can help you make smart tax decisions for you and your
The Child Tax Credit
provides up to $1,000 for every qualifying
child under 17 in your care if you meet certain income requirements. For couples filing joint returns, the credit
phases out if your adjusted gross income exceeds $110,000. The phase-out starts at $75,000 for single
parents. If your filing status is Married Filing Separately, the phase-out
begins at $55,000.
You may also be able to take the Earned Income Tax Credit if you have less than $3,300 in investment
income and one of the following conditions apply:
- Three or more children
lived with you and you earned less than $46,227 ($51,567 if married filing
- Two children lived with
you and you earned less than $43,038 ($48,378 if married filing jointly),
- One child lived with you
and you earned less than $37,870 ($43,210 if married filing jointly).
Rising costs in childcare have been thinning wallets across
the nation. According to Child Care
Aware of America, the annual cost for center-based care for an infant is higher
than one year of in-state college tuition at a four-year public college. Fortunately,
the Child and Dependent Care Credit
provides some relief. If at least one
parent works, you can claim up to $3,000 of the total cost of child care for
one qualifying child. If you have two or
more qualifying children, you may be able to claim up to $6,000 of costs.
Also, your employer may exclude up to $5,000 from your
taxable wages for child-care expenses if your employer offers a Dependent Care Flexible Spending Account
option. This deduction may not be added
on top of the child and dependent care credit, so you must decide which works
best for you.
Federal tax credits are mainly offered for post-secondary
education, although some states may offer tax relief for parents paying for
parochial-school tuition and supplies for children in kindergarten through high
The American Opportunity
Credit was recently extended through December 2017. It allows for a credit
of up to $2,500 for tuition and related expenses for each of the first four
years attending college at least half-time. Individuals who earn no more than
$80,000 and couples earning no more than $160,000 are eligible for the full
American Opportunity Credit.
If you don’t claim the American Opportunity Credit or a
Tuition and Fees Deduction, the Lifetime
Learning Credit may be the credit for you.
It is a nonrefundable credit (a tax credit that can't reduce the amount
of tax owed to less than zero) of up to $2,000 per tax return. The limit on the Lifetime Learning Credit
applies to each tax return, rather than to each student. Though the half-time student requirement does
not apply, the course of study must be either part of a post-secondary degree
program or taken by the student to maintain or improve job skills. Other
features of the credit include:
- Tuition and fees required
for enrollment or attendance qualify as do other fees required for the
course. Additional expenses do not.
- The credit equals 20
percent of the amount spent on eligible expenses across all students on
the return. That means the full $2,000 credit is only available to a
taxpayer who pays $10,000 or more in qualifying tuition and fees and has
sufficient tax liability.
- Income limits are lower
than under the American opportunity tax credit. For 2012, the full credit
can be claimed by taxpayers whose modified AGI is $62,000 or less. For
married couples filing a joint
return, the limit is $124,000. The credit is phased out for taxpayers with
incomes above these levels.
If you don’t claim either of the education tax credits, you
still have the option to deduct up to $4,000 by taking the Tuition and Fees Deduction. The income limits for the tuition and
fees deduction are $80,000 for single taxpayers and $160,000 for married
couples filing jointly.
529 plan – Tax Shelter
A qualified tuition plan, or 529 plan, can help you save on
taxes while providing for your child’s education. The state-by-state 529 plans authorized by
the Internal Revenue Service allow you to invest and earn interest on the funds
without subjecting you to federal income taxes.
You must ensure that the withdrawals are spent on eligible education
expenses, including tuition and room and board.
Otherwise, you’ll get hit with income taxes after the money is spent.