Parents have special tax situations and benefits. Tax breaks for parenting expenses can result in a lower tax bill and a higher refund. Here are some key things parents need to know.
To begin with, for parents to take advantage of most of the child-related tax benefits, the child must have a Social Security Number (SSN), which serves as their Taxpayer Identification Number (TIN).
It’s advisable to obtain an SSN for a child as soon as possible after birth. This can typically be done through the hospital’s birth registration process by requesting a Social Security card as part of the birth certificate paperwork. If this wasn’t done, one can apply for an SSN for a child at any Social Security office by providing proof of the child’s U.S. citizenship, age, and identity, as well as proof of the parent’s identity.
Having an SSN for the child not only allows parents to claim various tax benefits but is also necessary for other purposes, such as opening a bank account for them, obtaining medical coverage, and applying for government services.
Here’s an overview of tax credits available for children and certain other dependents:
The Child Tax Credit for 2024 is currently set at $2,000 for each qualifying child, with the credit beginning to phase out when the parent’s modified adjusted gross income exceeds $200,000 ($400,000 for joint filers).
A taxpayer, in 2024, who is unable to claim the full amount of the child tax credit because their income tax liability is less than the credit amount, is allowed to take up to $1,700 of the tax credit as a refundable credit, referred to as the additional child tax credit.
Beginning with the year that a child turns age 17, no child credit can be claimed for that child. Instead, the Credit for Other Dependents, discussed below, is available.
There is legislation pending in Congress that will, if passed, further enhance the child credit.
To qualify for the credit, the taxpayer (and their spouse, if filing jointly) must be gainfully employed or actively seeking work. The only exception is if the taxpayer or spouse is disabled or a full-time student; in these cases, certain allowances are made.
The credit ranges from 20% to 35% of eligible childcare expenses, depending on the taxpayer’s adjusted gross income (AGI). For one child or dependent, up to $3,000 of the expenses are considered for the credit, and for two or more children or dependents, the cap is $6,000. Therefore, the maximum credit can range from $600 to $1,050 for one child and from $1,200 to $2,100 for two or more children, based on the taxpayer’s income.
To be eligible for the credit, the care provider cannot be the taxpayer’s spouse, the parent of the qualifying individual if the taxpayer’s child is under age 13, a dependent of the taxpayer, or the taxpayer’s child who is under age 19.
The credit is nonrefundable, meaning it can reduce the taxpayer’s owed taxes to zero, but the excess amount will not be paid out as a refund.
If the taxpayer’s employer provides dependent care benefits, these can be excluded from income up to certain limits ($5,000 for most, but with specific rules for lower amounts if there is only one qualifying person). However, any amount excluded from income reduces the eligible expenses for the credit.
The amount of the credit is subject to annual inflation adjustments. For 2024, the maximum amount that can be claimed is the lesser of the QAE or $16,810 per child. This amount is the same for both the credit and the exclusion for employer-provided adoption benefits mentioned below. For the adoption of a child with special needs, the full credit amount ($16,810 in 2024) is allowed in the tax year in which the adoption becomes final, regardless of the actual expenses incurred.
The eligible expenses include reasonable and necessary adoption fees, court costs, attorney fees, traveling expenses (including amounts spent for meals and lodging while away from home), and other expenses directly related to the legal adoption of an eligible child. Expenses related to the adoption of a spouse’s child do not qualify.
If an employer provides adoption assistance, parents may be able to exclude some of those benefits from their income. The maximum exclusion amount is the same as the credit amount, and it phases out at the same income levels. However, credit cannot be claimed for any employer-reimbursed adoption expense.
The credit and exclusion begin to phase out in 2024 for taxpayers with modified adjusted gross income (MAGI) above $252,150 and are completely phased out for taxpayers with MAGI above $292,150. These levels are adjusted annually for inflation. While most phaseout thresholds and caps associated with tax benefits vary by filing status, those for the adoption credit and employer-provided adoption benefits are the same for all filing statuses.
To qualify for the EITC, a parent must have earned income from working for someone, running or owning a business or farm, and meet certain basic rules, as well as have a child that meets all the “qualifying child” rules. Additional rules apply for workers without a qualifying child.
The credit is somewhat complicated, and the following is an overview of the maximum credits available based on the number of qualifying children and the adjusted gross income or earned income amounts where the EITC is totally phased out. These amounts are inflation adjusted annually and the amounts shown 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, meaning if the amount of the credit is more than the amount of tax owed, a taxpayer can receive the difference as a refund.
The credit is available for each dependent who does not qualify for the Child Tax Credit. This includes:
The credit amount is $500 for each eligible dependent, but it is non-refundable, meaning it can reduce a tax liability to zero, but none of the credit’s value can be received as a refund if it exceeds the tax liability.
Like the Child Tax Credit, the Credit for Other Dependents may phase out at higher income levels.
For the tax year 2024, the AOTC allows a credit of up to $2,500 per eligible student. This credit is calculated based on 100% of the first $2,000 of qualified education expenses paid for each eligible student, plus 25% of the next $2,000 of such expenses.
A quirk of this credit is that the one claiming the student also gets to claim the AOTC even if someone else pays the qualified education expenses, such as a grandparent.
One of the most beneficial aspects of the AOTC is that it is partially refundable. Up to 40% of the credit (up to $1,000) may be refundable. This means that even if no tax is owed, there is the potential to receive a refund of up to $1,000 per eligible student.
To qualify for the AOTC, there are specific eligibility requirements related to the student, the type of expenses that qualify, and the educational institution. The student must be pursuing a degree or other recognized education credential, be enrolled at least half-time for at least one academic period beginning in the tax year, and not have finished the first four years of higher education at the beginning of the tax year.
The AOTC can only be claimed for a maximum of four tax years per eligible student. This limitation ensures that the credit supports the initial years of higher education.
The amount of the AOTC that can be claimed may be limited by the modified adjusted gross income (MAGI). For unmarried taxpayers the credit begins to phase out when the MAGI reaches $80,000 and is fully phased out when it reaches $90,000. For married taxpayers filing jointly the phase out range is $160,000 to $180,000.
The student does not need to be pursuing a degree or be enrolled at least half-time.
The LLC allows taxpayers to claim 20% of the first $10,000 of qualified tuition and related expenses paid during the tax year, resulting in a maximum credit of $2,000 per tax return, not per student. Qualified expenses for the LLC are not as flexible as those for the AOTC and only include tuition and fees required for enrollment or attendance at an eligible educational institution
The LLC is non-refundable. This means it can reduce the tax liability to zero, but there won’t be a refund if the credit amount exceeds the tax liability. The Lifetime Learning Credit is also subject to the same MAGI phaseout as the AOTC.
Unlike the AOTC, there is no limit on the number of years the LLC can be claimed. This makes it particularly valuable for students who are in graduate school, taking professional degree courses, or enrolled in job skill improvement courses, as well as for those taking longer to complete their undergraduate degrees.
If qualified education expenses are paid for more than one student in the same year, there is the flexibility to choose different credits for different students.
Some states also have their own versions of the credits. If you have not been taking advantage of these credits in the past, generally the returns for the past three years can be amended to claim the credits. Please contact this office for assistance or if you have questions about any of the tax benefits included in this article.