Article highlights:
- Social Security Number
- Child Tax Credit
- Child and Dependent Care Credit
- Adoption Tax Credit.
- Earned Income Tax Credit
- Credit for Other Dependents
- American Opportunity Tax Credit
- Lifetime Learning Credit
Parents face unique tax issues and perks. Tax credits for parenting expenditures might lead to a reduced tax payment and a larger return. Here are some important things new parents should know.
To begin, for parents to take advantage of the majority of child-related tax advantages, the kid must obtain a Social Security Number (SSN), also known as a Taxpayer Identification Number (TIN).
It is best to get an SSN for a kid as soon as possible after delivery. This is normally accomplished during the hospital's birth registration procedure by obtaining a Social Security card as part of the birth certificate papers. If this has not been done, a kid may apply for an SSN at any Social Security office by presenting evidence of the child's U.S. citizenship, age, and identity, as well as proof of their parent's identification.
Having an SSN for the kid helps parents to claim numerous tax advantages, but it is also required for other reasons such as establishing a bank account, acquiring medical coverage, and applying for government services.
Here's an outline of the tax benefits offered to children and some other dependents:
Child Tax Credit
Taxpayers who list at least one kid as a dependant on their tax return may be eligible for the Child Tax Credit. The Child Tax Credit (CTC) is an important component of the United States tax system that provides financial assistance to taxpayers who have children. This credit attempts to lower families' tax liabilities, allowing them to better manage the expenses of raising children. The CTC has evolved throughout time, with considerable additions and revisions targeted at improving help for low-income families.
The kid Tax benefit for 2024 is presently set at $2,000 per qualified kid, with the benefit being phased down when the parent's modified adjusted gross income hits $200,000 ($400,000 for joint filers).
In 2024, a taxpayer who is unable to claim the entire amount of the child tax credit due to a lower income tax burden than the credit amount may receive up to $1,700 of the tax credit as a refundable credit, known as the supplementary child tax credit.
A kid may no longer claim child credit beyond the age of 17. Instead, the Credit for Other Dependents, as described below, is available.
There is legislation pending in Congress that, if enacted, would expand the child credit.
The Child and Dependent Care Credit
The Child and Dependent Care Credit is a tax benefit meant to help taxpayers who incur costs for the care of a child under the age of 13, a spouse, or a dependent, allowing the taxpayer to work or actively pursue employment. This credit is especially useful for parents or guardians of children under the age of 13, as well as those caring for dependents who are unable to care for themselves due to a handicap.
To be eligible for the credit, the taxpayer (and their spouse, if filing jointly) must be gainfully employed or actively seeking employment. The sole exception is if the taxpayer or spouse is handicapped or a full-time student; in these circumstances, special provisions are given.
The credit varies between 20% and 35% of acceptable childcare costs, based on the taxpayer's adjusted gross income (AGI). The credit covers up to $3,000 in costs for one kid or dependent, and $6,000 for two or more. Therefore, the maximum credit may vary from $600 to $1,050 for one kid and from $1,200 to $2,100 for two or more children, depending on the taxpayer's income level.
To be qualified for the credit, the care provider must not be the taxpayer's spouse, the parent of the qualifying person if the taxpayer's kid is under the age of 13, a taxpayer dependant, or the taxpayer's child under the age of 19.
The credit is nonrefundable, which means that although it may decrease the taxpayer's due taxes to zero, the extra money will not be refunded.
If the taxpayer's employer offers dependent care benefits, they may be deducted from income up to specified restrictions ($5,000 for most, with special regulations for smaller amounts if just one qualified individual). However, any sum withheld from income diminishes the credit's qualifying costs.
Adoption Tax Credit
This tax credit is intended to assist cover the expenditures connected with the adoption process. This credit enables taxpayers to claim a credit for qualified adoption expenditures (QAE) incurred when adopting a child.
The credit amount is adjusted annually to reflect inflation. For 2024, the maximum amount that may be claimed is the lesser of the QAE and $16,810 per kid. This amount is the same for both the credit and the exclusion for employer-provided adoption benefits, as detailed below. The entire credit amount ($16,810 in 2024) for adopting a child with special needs is available in the tax year in which the adoption becomes permanent, regardless of the actual expenditures paid.
Eligible expenditures include reasonable and necessary adoption fees, court costs, attorney fees, travel expenses (including meals and housing while away from home), and any expenses directly associated to an eligible child's lawful adoption. Expenses for the adoption of a spouse's kid do not qualify.
If an employer offers adoption help, parents may be able to deduct part of the benefits from their earnings. The maximum exclusion amount is equal to the credit amount and goes down at the same income levels. Credit cannot be claimed for any employer-reimbursed adoption costs.
The credit and exclusion begin to phase away in 2024 for taxpayers with modified adjusted gross income (MAGI) more than $252,150, and are totally eliminated for taxpayers with MAGI greater than $292,150. These numbers are modified yearly for inflation. While the majority of phaseout criteria and limitations connected with tax benefits differ by filing status, the adoption credit and employer-provided adoption benefits apply to all filing situations equally.
Earned Income Tax Credit
The federal Earned Income Tax Credit (EITC) is a benefit intended for low- to moderate-income working people and families, especially those with children. The amount of EITC benefit a worker may get is determined on their income, filing status, and the number of qualified children. The benefit is intended to promote and reward employment while also offsetting some of the additional living expenditures and federal payroll taxes that qualifying workers face.
To be eligible for the EITC, a parent must have earned money by working for someone else, operating or owning a company or farm, and meeting some fundamental conditions, as well as having a kid who fulfills all of the "qualifying child" requirements. Additional criteria apply to workers who do not have a qualified kid.
The credit is quite technical, thus the following is an outline of the maximum credits available depending on the number of eligible children and adjusted gross income or earned income levels where the EITC has been completely phased out. These amounts are updated by inflation each year, and the numbers given are for 2024.
|
Number of Qualifying Children |
None |
One |
Two |
Three |
|
Maximum EITC |
$632 |
$4,213 |
$6,960 |
$7,830 |
|
Credit Totally Phased Out at AGI Or Earned Income of: |
||||
|
Married Filing Joint |
$25,511 |
$56,004 |
$62,688 |
$66,819 |
|
Other Filing Statuses* |
$18,591 |
$49,084 |
$55,768 |
$59,899 |
|
*Individuals filing as Married Filing Separate do not qualify for the credit |
||||
The EITC is a refundable tax credit, which means that if the credit exceeds the amount of tax payable, a taxpayer may receive the difference as a refund.
The Credit for Other Dependents
The credit is accessible to all dependents who do not qualify for the Child Tax Credit. This includes:
- Dependents who are children but do not qualify for the Child Tax Credit, such as those without a Social Security Number (SSN) but with an Individual Taxpayer Identification Number (ITIN) or an Adoption Taxpayer Identification Number (ATIN).
- Children turning 17 before the conclusion of the tax year.
- Non-Child Dependents include parents and other relatives who satisfy certain qualifications.
The credit is $500 for each qualified dependent, however it is non-refundable. This means that although it may decrease a tax payment to zero, no portion of the credit's value can be refunded if it exceeds the tax due.
Similar to the Child Tax Credit, the Credit for Other Dependents may phase off at higher income levels.
American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC) provides considerable tax advantages to taxpayers who spend qualifying school costs for eligible students, often their children, who are pursuing a higher education.
For the fiscal year 2024, the AOTC provides a credit of up to $2,500 per qualified student. This credit is computed as 100% of the first $2,000 of qualifying school expenditures paid for each eligible student, plus 25% of the following $2,000 in such expenses.
One unique aspect of this credit is that the person claiming the student may still claim the AOTC even if someone else, such as a grandparent, pays the eligible school expenditures.
One of the most advantageous features of the AOTC is that it is partly refundable. Up to 40% of the credit (up to $1,000) might be refunded. This implies that even if no tax is payable, qualified students might get a return of up to $1,000 each.
To be eligible for the AOTC, the student, the sort of costs that qualify, and the educational institution must all meet particular criteria. The student must be seeking a degree or other recognized educational credential, enrolled at least half-time for at least one academic period starting in the tax year, and have not completed the first four years of higher education at the start of the tax year.
The AOTC may be claimed for up to four tax years per qualifying student. This restriction guarantees that the credit only covers the first years of higher study.
The amount of AOTC that may be claimed may be restricted by your modified adjusted gross income (MAGI). For unmarried taxpayers, the credit starts to taper down when their MAGI exceeds $80,000 and is completely phased out when it reaches $90,000. For married taxpayers filing jointly, the phase-out range is $160,000 to $180,000.
Lifetime Learning Credit
The Lifetime Learning Credit (LLC) is a tax credit that provides considerable advantages to taxpayers who pay for higher education costs for themselves, a spouse, or a dependent child.
The student is not required to pursue a degree or be enrolled at least half-time.
The LLC lets taxpayers to claim 20% of the first $10,000 in eligible tuition and associated expenditures paid during the tax year, for a total credit of $2,000 per tax return, not per student. Qualified costs for the LLC are less flexible than those for the AOTC, and only include tuition and fees necessary for enrollment or attendance at an accredited educational institution.
The LLC is nonrefundable. This implies that although it may decrease the tax payment to zero, no refund will be issued if the credit amount exceeds the tax due. The Lifetime Learning Credit is subject to the same MAGI phaseout as the AOTC.
Unlike the AOTC, the LLC may be claimed for an unlimited number of years. This makes it especially useful for students in graduate school, pursuing professional degrees, or engaged in employment skill enhancement courses, as well as those who are taking longer to finish their undergraduate degrees.
If eligible education expenditures are paid for more than one student in the same year, the credits might be chosen differently for each student.
Some states have their own version of the credits. If you have not already taken advantage of these credits, you may normally modify your returns for the previous three years to claim them. Please contact our office if you need help or have any concerns concerning the tax advantages mentioned in this article.
