09 Jan 4 Surprising Tax Deductions For Parents
By Mark T. Berry
Let’s start with something you already know — kids are expensive. Middle-income families can expect to spend an average of $245,340 to raise a child born in 2013, according to research by the U.S. Department of Agriculture. That doesn’t even include the cost of college.
Fortunately, there are several tax deductions that help soften the blow. Most people know about the Child Tax Credit, which knocks $1,000 off your tax bill for each dependent child. This credit begins to phase out for individuals earning over $75,000 or couples earning over $110,000.
But there are several other ways being a parent reduces your tax obligations.
1. Earned Income Credit
The Earned Income Tax Credit, or EITC, is not just for parents, but the income limits are much higher for people with dependent children.
Income limits for the EITC are as follows:
|Filing status||No qualifying children||1 qualifying child||2 qualifying children||3+ qualifying children|
|Single, Head of Household or Widowed||$14,880||$39,296||$44,648||$47,955|
|Married Filing Jointly||$20,430||$44,846||$50,198||$53,505|
This credit can be quite large, maxing out at $6,269 for those with three or more children.
Ready for some more good news? Because it’s a credit, not a deduction, you stand to receive this money from the government even if you don’t owe any tax at all.
2. Dependent care
You know what they say: It takes money to make money. That’s especially true if you have a kid in daycare. Paying for childcare is one of the biggest expenses parents face, but some of your daycare expenses can reduce your tax bill.
There are two ways of doing this. First, if your employer offers a Dependent Care Flexible Spending Account, you can elect to have money deducted from your paycheck pre-tax. Then, when you pay your childcare provider, you request a reimbursement from your flexible spending account (FSA.) Your taxable income will be reduced by the amount of money you set aside in your FSA. But be careful — if you don’t use all the money in your FSA, you may lose it.
If you don’t have access to a FSA, take a look at the Child and Dependent Care tax credit. The credit is based on the first $3,000 in dependent care expenses for one child, or the first $6,000 in care expenses for two children.
Have a dependent who is not your child? You may be able to deduct the cost of care for other dependents, such as your husband or wife who is unable to care for themselves while you’re at work. Adult day care services for your mom or dad, if they’re your dependent, may also qualify you. Tell us about your dependents, and we’ll help you figure out if you qualify for the tax credit.
3. Medical expenses
Most medical expenses aren’t tax deductible unless the total amount you spend on health care is more than 10% of your adjusted gross income. But if you have a child with a chronic health condition requiring expensive care, this can be a big boon. Health care costs for yourself, your spouse and your dependents all count toward that 10% threshold.
Qualifying expenses include:
- Doctor and pharmacy co-pays
- Any portion of your health insurance premiums that are paid with post-tax money
- Some costs associated with travel to and from medical facilities
- Dental care
- Home alterations prescribed by a doctor, such as wheelchair ramps
- The difference in cost between regular food and a doctor-prescribed special diet
- Educational costs including tuition, tutoring and transportation if your child goes to a school that specializes in addressing a diagnosed medical condition.
Unless your child goes to a school for special needs, educational expenses won’t be deductible until they reach college.
Once there, though, there are a couple of options for deducting some of that tuition bill, as long as you meet the income requirements.
Tuition and fees deduction: This deduction allows you to reduce your taxable income by up to $4,000. This deduction is available if you’re paying college tuition at an eligible school for yourself, your spouse, or your child or other dependent.
American Opportunity Credit: This credit of up to $2,500 is only available for the student’s first 4-year degree. The student must be enrolled in a degree program at least half time, and must not have any felony drug convictions. The credit is not permanent, but is available for the 2016 tax year. Note: If this credit is more than the tax you owe, you can only take 40% of it as a tax refund.
Lifetime Learning Credit: This smaller credit is only $2,000, and none of it is refundable. That means it can reduce your tax by up to $2,000, but the balance won’t be refunded to you if you owe less than $2,000 in taxes. You can take this credit or the American Opportunity Credit, not both. But the Lifetime Learning Credit is available an unlimited number of years, and the eligibility requirements are more flexible.
Have Questions? We can help!
Not sure if any of these tax deductions and credits apply to you? Make an appointment today. We can help you figure out the best ways to get a tax break on some of the more expensive aspects of raising the next generation of taxpayers. Call us at 215-844-9518 or email us.