Having a child is about a lot more than tax breaks…but the tax breaks sure don’t hurt! Here’s 10 tax “benefits” for parents from the IRS…though I don’t quite agree with the IRS that numbers 6 & 7 are “benefits.” You be the judge… (I’ll throw in a couple more at the end to make it a true 10.)
- Dependents In most cases, a child can be claimed as a dependent in the year they were born. For more information see IRS Publication 501, Exemptions, Standard Deduction, and Filing Information.
- Child Tax Credit You may be able to take this credit on your tax return for each of your children under age 17. If you do not benefit from the full amount of the Child Tax Credit, you may be eligible for the Additional Child Tax Credit. For more information see IRS Publication 972, Child Tax Credit.
- Child and Dependent Care Credit You may be able to claim the credit if you pay someone to care for your child under age 13 so that you can work or look for work. For more information see IRS Publication 503, Child and Dependent Care Expenses.
- Earned Income Tax Credit The EITC is a benefit for certain people who work and have earned income from wages, self-employment or farming. EITC reduces the amount of tax you owe and may also give you a refund. For more information see IRS Publication 596, Earned Income Credit.
- Adoption Credit You may be able to take a tax credit for qualifying expenses paid to adopt an eligible child. Taxpayers claiming the adoption credit must file a paper tax return because adoption-related documentation must be included. For more information see the instructions for IRS Form 8839, Qualified Adoption Expenses.
- Children with Earned Income If your child has income earned from working they may be required to file a tax return. For more information see IRS Publication 501.
- Children with Investment Income Under certain circumstances a child’s investment income may be taxed at the parent’s tax rate. For more information see IRS Publication 929, Tax Rules for Children and Dependents.
- Higher Education Credits Education tax credits can help offset the costs of education. The American Opportunity and the Lifetime Learning Credit are education credits that reduce your federal income tax dollar-for-dollar, unlike a deduction, which reduces your taxable income. For more information see IRS Publication 970, Tax Benefits for Education.
- Student loan Interest You may be able to deduct interest you pay on a qualified student loan. The deduction is claimed as an adjustment to income so you do not need to itemize your deductions. For more information see IRS Publication 970.
- Self-employed health insurance deduction If you were self-employed and paid for health insurance, you may be able to deduct any premiums you paid for coverage after March 29, 2010, for any child of yours who was under age 27 at the end of 2010, even if the child was not your dependent. For more information see the IRS website.
The forms and publications on these topics can be found at IRS.gov or by calling 800-TAX-FORM (800-829-3676).
OK, so here’s the benefit the IRS “forgot” to mention on number 7. Though a child’s investment income is generally taxed at the parents’ rate if there is more than $1900 in investment income, there’s still an opportunity to lower your tax bill just a little bit by giving investments to your children. A single parent can give each child $13,000 in investment assets before triggering the requirement to file a gift tax return…married parents can give $13,000 each, or $26,000 total to each child. Do this for several years, and you could have assets earning significant income.
This used to be a very popular tax dodge for affluent individuals, so the IRS has limited the tax-free and reduced-tax earnings to relatively small amounts. However, if you’re planning to give assets to your children anyway, placing those assets in the child’s name now (with appropriate safeguards to make sure the assets aren’t all used in the iTunes Store) can reduce your tax bill by several hundred dollars each year.
And finally, to give us 10 TRUE benefits, you might consider contributing to a Qualified Tuition Plan for your child. You don’t get a deduction for contributions to these plans, but the earnings within the plan are tax-free as long as the funds are ultimately used for the qualified education costs of the plan beneficiary. Most states have their own “flavor” of these plans, with various tax incentives on your state tax return, so check with your bank or financial institution to see what’s offered in your state.