It's no secret that raising kids is expensive—but did you know that it’s now reached price-of-a-vacation-condo-at-the-beach and splurge-on-a-Bentley expensive? The cost of rearing a middle-class American child from infancy to the age of 17 is now an estimated at $233,610—and that’s before you start getting those college bills.
Fortunately, parents get a little bit of financial relief every April, courtesy of the U.S. government. Your little ones can nab you a number of tax breaks, but unless you’re an accountant yourself, it can be easy to miss out on them.
That’s why we asked Michael Goldfine, a New York City–based certified public accountant, and Jeffrey Schneider, an enrolled tax agent based in Royal Palm Beach, Florida, to highlight the 11 deductions, credits and tax strategies that every parent should know about—whether you have a toddler, or a college senior who's just about to graduate.
Tax Breaks for Parents With Kids of Any Age
Dependent Exemption: As soon as your little bundle arrives, he or she earns you a break on your taxes. For 2016 the dependent exemption reduces your taxable income by $4,050 for each dependent child under the age of 19—or until the age of 24, in the case of a full-time student. For divorced parents, the exemption typically goes to the parent who has custody of the child most of the year.
Child Tax Credit: The child tax credit shaves up to $1,000 off your tax bill for every kid under the age of 17. There are a handful of requirements for eligibility, such as the fact that the child must be claimed as your dependent and live with you for at least half of the year. The credit phases out for married couples filing jointly with incomes above $110,000, for a single head of household with an income of $75,000 or for a married person filing separately with an income of $55,000.
Medical Mileage Deduction: Toting your kid to all of those doctors appointments could earn you a tax break. Parents can often deduct travel expenses associated with medical visits, but there are restrictions. “The mileage used when you take your child for their normal doctor checkup is not deductible,” Schneider says. “But if [the trip is because] they are sick, it is.” You can deduct the cost of gas, parking and tolls related to the visits using the 2016 standard medical mileage rate of 19 cents per mile.
Tax Breaks for Parents With Infants and Kids in Elementary School
Child and Dependent Care Credit: If you paid for child care last year while working or looking for work, you may be eligible for a credit of anywhere from 20% to 35% of your child care costs, with a cap of $3,000 per child and $6,000 for more than one child. While the credit is most applicable to those with young children, care for any child under the age of 13 may be eligible, says Schneider. The credit can also be applied to after-school care, as well as day camps during school vacations.
An often-overlooked requirement, however, is that both parents must be working. “A lot of people don’t realize that if only one parent is working, they won’t get the full credit,” Goldfine says. There are two exceptions to that rule: if the nonworking spouse is either looking for a job or is in school full-time.
Dependent Care FSA: A Dependent Care Flexible Spending Account is sometimes offered by employers and lets you set aside pre-tax money to pay for qualified child care expenses for kids under the age of 13. The IRS caps the amount you can put aside at $5,000 or $2,500 for a married person filing separately, and because you can’t take advantage of both the FSA and the child and dependent care credit, it pays to do the math to determine which option works best for your situation. Goldfine, however, thinks saving via the FSA probably makes the most sense. “Anytime that you can get tax-free money, it makes sense to take advantage of that.”
Adoption Credit: If you adopted a child in 2016, you may be eligible for a tax credit of up to $13,460 per child in order to offset qualified adoption expenses, which could include attorney fees, court costs and related travel expenses.
Tax Breaks for Parents With Tweens and College-Bound Teens
529 Plan: A 529 plan won’t get you any federal tax benefits, but money you set aside for a child’s college education grows tax-deferred, and many plans are eligible for state tax deductions. If you can afford it, you can even consider opening an account before your child hits the tween years. In fact, Goldfine suggests starting a 529 as soon as your child gets a Social Security number.
Just remember to stay on top of your annual contributions. In any given year, “you have to be careful how much you contribute because [at more than $14,000], you have a gift tax problem,” Schneider says. Some parents and grandparents use 529s as part of their estate planning strategy, “frontloading” an account with a $70,000 donation in a single year and then treating it as a five-year gift. As long as no other money is given to the child over the next five years, those funds don’t trigger a gift tax.
Hiring Your Kid: If you run a small business as a sole proprietorship, giving your child an after-school or summer-break job can be a good tax strategy, Goldfine says. You can write off their salaries as a business deduction, thereby lowering your own taxable income. You also won't have to withhold federal employment taxes (for Social Security and Medicare) for a child under the age of 18, and your kid won’t pay federal income tax on the first $6,100, which is the IRS’ standard deduction for single taxpayers.
Plus, hiring your child keeps the money in the family. Just be sure to pay a fair wage, and that the job’s duties are age-appropriate, or you might attract the attention of the IRS. Hiring a 15-year-old to do computer work probably won’t raise much suspicion, but hiring your 9-year-old to do the same could be a red flag.
Tax Breaks for Parents With College Kids
American Opportunity Education Tax Credit: This credit gives parents up to $2,500 per student for tuition, fees, books and other education supplies for each of the first four years of post-secondary education. It’s available to individuals who earn no more than $80,000, and couples earning no more than $160,000—and it replaces the predecessor Hope Credit, which had a lower income limit and covered fewer expenses.
“The best part about [the American Opportunity Credit] is it not only includes tuition and related fees,” Schneider says, “but also books and required equipment, like computers, stethoscopes for nursing students and calculators for accounting students.”
Lifetime Learning Credit: If your child chooses to pursue a certification program in lieu of attending college, you can take the Lifetime Learning Credit, which applies to nondegree and other professional training programs. It has a maximum benefit of $2,000, and income eligibility is capped at $65,000 for single tax filers and $131,000 for joint filers. The credit is limited to one per household, and if a child is eligible for both the American Opportunity Credit and the Lifetime Learning Credit in the same year, you can take either credit but not both.
Tuition and Fees Tax Deduction: This benefit, which cannot be used if you are already claiming the American Opportunity or Lifetime Learning credit, allows you to deduct up to $4,000 from your taxable income for a child’s college expenses. The deduction begins to phase out for single parents earning over $80,000 and joint filers earning $160,000.
This story was updated on February 27, 2017.
This publication is not intended as legal or tax advice. Taxpayers should seek advice based on their particular circumstances from an independent tax advisor.