5 Tax Credits That Can Save Parents Big Money
As a parent, you know how expenses can add up. Having kids brings a certain level of base additional costs into your life like food, shelter and clothing. Then there are child care, extracurricular activities and inevitable medical costs, all of which are extremely pricey. And we haven’t even mentioned college tuition yet, which most parents will tell you ranges from extravagant to astronomical.
When it comes to providing for your children, every dollar counts. Here are five tax credit plans available to parents to help ease the expenses that come with having one or more little bundles of joy.
Child Tax Credit (CTC)
In 2021, the American Rescue Plan Act (ARP) expanded the Child Tax Credit significantly for one year, making it the largest U.S. child tax credit ever and providing most working families with $3,000 per child under 18 years of age and $3,600 per child aged 6 and younger.
The ARP also made the credit fully refundable and provided tax credit options for families to take half the credit in six monthly payments. As of July 15, 2021, 39 million households, providing for 88% of children in the United States, automatically began receiving payments of between $250 and $300, if they had chosen to.
Child and Dependent Care Tax Credit
The Child and Dependent Care Tax Credit may not be as well known as the CTC, but it may yield more in tax credits. Originally created in the 1970s to help working parents offset the cost of daycare, afterschool programs and summer camps, this credit was also expanded by the 2021 ARP noted above, augmenting what can be claimed by parents for child care expenses and making it fully refundable.
Under this tax credit, 50% of child care expenses can be claimed on taxes, up to $8,000 for parents with one child and up to $16,000 for parents with two or more children, making maximum tax credit of $4,000 and $8,000 respectively.
Earned Income Tax Credit (EITC)
The EITC is a tax credit for workers earning low to moderate incomes and is based on several factors including family size, filing status and income limits (both from employment and investments).
You may apply for EITC even if your children do not qualify. However, for those with qualifying children, the basic qualifying rules state you must: have worked and earned income under $57,414, have investment income below $10,000, have a valid Social Security number by the due date of your return, be a U.S. citizen of a resident alien all year, not file Form 2555 (for foreign earned income exclusion).
American Opportunity Tax Credit (AOTC)
The American Opportunity Tax Credit is a credit for qualified education expenses paid to an eligible student for the first four years of higher education, including tuition, fees and course materials (room and board, medical costs, transportation and insurance are excluded). The maximum annual credit is $2,500 per eligible student.
To claim the full credit, your modified adjusted gross income (MAGI) must be $80,000 or less for single filers and $160,000 or less for married joint-filers.
529 State Tax Plans
529 plans are state-run, tax-advantaged accounts that allow you to save for a child’s college education. All states offer these types of plans (except for Wyoming, for some reason).
There are two types of 529 state tax plans: savings plans and prepaid tuition plans. Because each state has different plans and because you don’t necessarily have to be a resident of a state to get its 529, do your research carefully and pay attention to the tax breaks, fees, investment strategies and type of plan each state provides.
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