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 parents will tell you can range 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)
People with children under the age of 16 may be eligible to claim a Child Tax Credit of up to $2,000 per qualifying dependent when filing for 2022 tax returns. Also, for the 2022 tax year, the age limit to qualify for the CTC now stands at 16 years old.
In 2022, the IRS did not distribute Advanced Child Tax Credit, but, the amount of credit a parent can claim on their 2022 income tax return may be greater than the 2021 tax season.
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, augmenting what can be claimed by parents for child care expenses and making it fully refundable.
Under this tax credit, up to $2,100 for parents with one child and up to $4,200 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 $59,187, have investment income below $10,300, 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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Amen Oyiboke-Osifo contributed to this article.