How much money do you need to raise a child? According to an estimate from the U.S. Department of Agriculture, it will cost a middle-income couple roughly $245,000 to raise a child born in 2013 to the age of 18. This is up 1.8 percent from the prior year. Plus, the estimated average cost is much higher in certain parts of the country. For example, high-income families living in the urban Northeast United States are projected to spend almost $455,000 to raise a child for 18 years.
These figures cover costs for housing, food, transportation, clothing, health care, education, childcare, and miscellaneous expenses such as cell phones and sports team fees. But they do not include college. That can easily add tens or hundreds of thousands of extra dollars to the tab.
The tax code offers some measure of tax relief. Here is a list of 10 federal tax breaks for parents.
- Dependency Exemptions
You can generally claim a dependency exemption for a child under age 19 or a full-time student under age 24, if you provide more than half of the child’s annual support. Each dependency exemption is $4,000 for 2015. However, you may lose at least part of the benefit of your exemptions if your adjusted gross income (AGI) is above a certain amount.
- Child Tax Credit
Parents may be entitled to the child tax credit for each qualifying child under age 17 at the end of the year. The maximum credit for 2015 is $1,000 per child.
You may lose at least part of the benefit of your exemptions if your modified adjusted gross income (MAGI) is above a certain amount. To qualify, you must meet certain criteria regarding the child.
- Child and Dependent Care Credit
Another tax credit may be claimed if you pay someone to care for a child under the age of 13, allowing you (and your spouse, if married) to be gainfully employed. The child and dependent care credit is based on a sliding scale. For parents with an AGI of more than $43,000, it’s equal to 20 percent of qualified expenses paid to a qualified caregiver to ensure the child’s well-being and protection. The total expenses that you may use to calculate the credit should not be more than $3,000 for one qualifying child or $6,000 for two or more qualifying children.
- Earned Income Tax Credit (EITC)
This credit is only available to certain lower-income families. On a 2015 return, the maximum EITC amount available is $3,359 for taxpayers filing jointly with one child; $5,548 for two children; and $6,242 for three or more children. You may be eligible for the EITC without a qualifying child, but the credit is higher for families with children. If you can claim the EITC on your federal income tax return, you may be able to take a similar credit on your state or local income tax return, where available.
- Adoption Credit
If you adopt a child, you may be eligible for a special tax credit for qualifying expenses. On a 2015 return, the maximum adoption credit is equal to $13,400 of the qualified expenses incurred to adopt an eligible child. However, credit amounts are phased out for upper-income taxpayers based on MAGI. The adoption credit begins to phase out for taxpayers with MAGI of $201,010 and is eliminated for those with MAGI of $241,010 or more.
- Higher Education Credits
If you pay higher education costs for yourself or an immediate family member, including a child, you may qualify for one of two education tax credits (but you can’t claim both). The maximum American Opportunity Tax Credit is $2,500 per student while the maximum Lifetime Learning Credit is $2,000 per taxpayer. Both higher education credits are phased out for upper-income taxpayers based on MAGI.
- Tuition Deduction
The deduction for qualified tuition and fee expenses, which had expired after 2013, was retroactively extended for 2014 by new legislation. It’s on the list of tax breaks Congress will address extending in 2015. Depending on your MAGI, the deduction on a 2014 return is either $4,000 or $2,000 before it’s completely phased out. Note that you can’t deduct tuition expenses if you claim one of the higher education credits.
- Student Loan Interest
You may be able to deduct interest you paid on a qualified student loan up to a maximum of $2,500 for 2015. This “above the line” deduction can be claimed whether or not you itemize deductions on your tax return. You can only claim the deduction if your MAGI is less than a specified amount, which is set annually. The amount of student loan interest is phased out if your MAGI is between $65,000 and $80,000 ($130,000 and $160,000 if you are married and file jointly).
- Self-Employed Health Insurance Deduction
If you’re self-employed and pay for health insurance, you may be able to deduct premiums paid to cover your child, as well as yourself and your spouse, if married. This tax break, which was authorized by the Affordable Care Act, applies to children who are under age 27 at the end of the year, even if the child isn’t your dependent.
- Potential Lower Tax Rates
Last but not least, parents may be able to benefit from shifting income-generating assets to children. As a result, income that is normally taxed to the parents in their high tax bracket is taxed to the children in their lower tax brackets. Of course, this means you must give up control over the assets.
However, remember that this strategy may be mitigated by the Kiddie Tax. Under the “Kiddie Tax,” the unearned income received by a dependent child under age 19, or a full-time student under age 24, is taxed at the top rate of the child’s parents to the extent that it exceeds $2,100 in 2015.
For more information about any of the above 10 child tax breaks — including limitations, detailed rules, and exceptions — email us or call 216.524.8900.