Anyone that has children can tell you they are a blessing. However, they can also tell you that children are expensive! Luckily, the IRS is well aware of the financial strain children may be; for this reason, they implemented certain tax benefits especially for those with children. With these credits, you can meet your tax obligations without breaking the bank!
Each of these credits, however, has certain requirements for claiming them, such as the qualifying status of the child, relationship requirements, and residency requirements.
Child and Dependent Care Credit
While this credit also applies to the care of disabled persons, it is also beneficial for those paying for daycare. The limit for this credit is $3,000 for one qualifying person or $6,000 for two more.
In order to calculate this credit, you multiply the actual amount paid for care or the limit, whichever is lower, times a percentage of your adjusted gross income (AGI). Depending on your AGI, this percentage could be anywhere from 20% to 35%. If your income is $43,000 or more, the 20% percentage applies. The lower your income, the higher the percentage available, up to 35%. The primary disadvantage to this credit is that so little of the expense is actually recoverable.
Earned Income Credit
This little credit can save serious tax money. It is available for earned income levels up to $37,263, but the income level that most benefits is $11,000 and $16,400. This range receives the full advantage, up to $4,400 depending on the number of dependents and your filing status. While the earned income credit is most beneficial for those with children, it is also available for extremely low income individuals without children.
Some people are incredibly intimidated by computing this credit because it is somewhat complicated. For this reason, it may be advisable to utilize a tax service, such as TaxBrain.com.
Child Tax Credit
The child tax credit is basically a credit designed to reduce your tax liability. $1,000 is the most you can claim per qualified child; however, this depends on your income level and tax burden. You must actually have a tax liability to claim the credit. If the tax you owe is $0, you may not claim the credit to the full extent as you do not have any taxes to reduce.
There are also income requirements to fully benefit from the child tax credit. If your modified adjusted gross income is over $110,000 (married filing jointly), $75,000 (single, head of household, qualifying widow), or $55,000 (married filing separately), the credit is reduced. However, the additional child tax credit is also an option if you are disqualified, even in part, from utilizing the child tax credit.
The additional child tax credit may also be an option if you have three or more qualifying children. This may be available up the amount of social security taxes you paid during the year minus the amount of earned income credit you received.