Raising a child in todays world is not cheap by any means. Estimates for raising a child from birth through college in a middle class household range from $200,000 to $400,000.
The Brookings institute recently said that with the higher than normal levels of inflation, the cost of raising a child through high school in the US to more than $300,000 or more than $18,000 per annum. And costs are growing every year as education, health care and living expenses continue to rise.
One mitigation or way to lessen the impact of these child related expenses is provided by the Federal government via a number of tax breaks.
Here are some of the more widely available tax breaks for children or dependents you need to review and take advantage of when filing your next tax return.
Most online tax software packages will walk you through qualification criteria and amounts you and your dependents may be eligible for. If you are not taking advantage of these and basically giving up free money.
Child Tax Credit
The Child Tax Credit is available to families with children under the age of 17 (age 16 or younger). It was expanded during the pandemic, but has now returned to normal and provides $2,000 per child in 2022 and 2023.
Families must have at least $2,500 in earned income to claim any portion of the credit. There are other relationship and income requirements to qualify for this credit but if you have young kids and are a middle income household you should qualify for some or all of this credit.
Several states have also enacted a state child tax credit in addition to the federal credit.
Additional Child Tax Credit
Even if your total credit exceeds the amount of your tax liability for the year and you don’t qualify for the full child tax credit, you may still be eligible for the additional child tax credit.
This is the refundable part of the CTC and eligible taxpayers can receive a refund worth 15 percent of earnings above $2,500, up to $1,500 per child. You get this amount even if you don’t owe taxes.
The Additional Child Tax Credit qualification is tied to the Child Tax Credit, but you need to complete IRS Form 8812 to determine if you are eligible (has a more complex calculation criteria).
American opportunity tax credit
The American Opportunity Tax Credit (AOTC) – formerly the Hope Scholarship credit – offers up to $2,500 in tax credits for qualified higher education expenses. This is made up of 100% of the first $2,000 of qualified expenses, plus 25% of the next $2,000 of qualified expenses.
In addition, interest deductions are available for interest paid on student loans for higher education. The AOTC is subject to income limits as follows:
- Modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less for married filing jointly).
- You receive a reduced amount of the credit if your MAGI is over $80,000 but less than $90,000 (over $160,000 but less than $180,000 for married filing jointly).
- You cannot claim the credit if your MAGI is over $90,000 ($180,000 for joint filers).
There are also two other education tax breaks that parents can claim. One is the Lifetime Learning Credit (LLC) of $2,000. And the other is the tuition deduction of up to $4,000. Note however a deduction can only reduce your tax liability, whereas with a tax credit you get the money whether or not you owe taxes.
|Criteria||AOTC||LLC||Tuition and Fees Deduction|
|Maximum credit or benefit||Up to $2,500 credit per eligible student||Up to $2,000 credit per return||Up to $4,000 taxable income reduction per return|
|Refundable or nonrefundable||40% of credit||Not refundable||Does not apply|
|Limit on MAGI for married filing jointly||$180,000||$128,000||$160,000|
|Limit on MAGI for single or head of household||$90,000||$64,000||$80,000|
|Dependent status||Cannot claim credit if you are claimed as a dependent on someone else’s return|
|Number of years of post-secondary education available||Only if student hasn’t completed 4 years of post secondary education before 2014||All years of post secondary education and for courses to acquire or improve job skills||All years of post secondary education|
|Number of tax years credit available||4 tax years per eligible student including any years former Hope credit claimed||Unlimited||Unlimited|
|Type of program required||Student must be pursuing a degree or other recognized education credential||Student does not need to be pursuing a degree or other recognized education credential||Student must be enrolled at eligible educational institution for one or more courses|
|Number of courses||Student must be enrolled at least half time for at least one academic period in the year||Available for one or more courses||Available for one or more courses at eligible educational institution|
|Qualified expenses||Tuition, required enrollment fees and course materials needed for course of study||Tuition and fees required for enrollment or attendance||Tuition and fees required for enrollment or attendance|
|Whom can you claim the benefit for?||You, Spouse, Dependent Student|
While high school school students generally don’t qualify for these credits, if they are taking college level classes you may be able to claim some portion of this credit. Note that tuition must have been paid to the college in order to claim the expenses on your return (you cannot pay the high school).
Earned Income Tax Credit (EITC)
The EITC supplements the wages of low income workers and families, lifting more children out of poverty than any other single federal program. You can see the latest and past EITC tables and details here, by filing status and income qualification thresholds. These limits are adjusted annually in line with inflation and other government mandates.