Being a parent is hard enough. Being a parent during tax time adds a whole new layer of complexity beyond just trying to figure out what to do with your refund.
This is especially true for those who might not know the correct way to claim dependents or what deductions they can take.
It doesn’t matter how many children you have, there are plenty of financial benefits to having kids come tax time.
Here are 16 important tax tips every parent should know.
Adoption has two tax benefits. The first is a credit to offset qualified adoption expenses. The second is an exclusion from income for employer-provided adoption assistance.
Qualified expenses include:
- Adoption fees
- Court costs and attorney fees
- Travel expenses
Beware that there are limits to what you can claim and the credit is nonrefundable, so it can’t be more than what you owe.
Child tax credit
The child tax credit is one of the best tools in your arsenal when it comes to lowering your tax bill, though it’s not as big as it was for 2021.
For this tax season, the credit is $2,000 per qualifying child. To get the full amount, your annual income can’t exceed $200,000 for individuals, or $400,000 for couples filing jointly.
Child and dependent care credit
The credit for child and dependent care expenses is designed to help those who pay someone, like a babysitter, to look after people while they work or look for work.
Qualified individuals are kids under 13 or a disabled dependent of any age who lives with you for more than half the year.
The credit is based on your income and what percentage you spend on care. It tops out at $3,000 for one qualifying person and $6,000 for two or more.
Claim your dependents
One of the most obvious tax moves parents should make is claiming new children as dependents. This is what will open up more credits and deductions.
If you’re unsure who you can claim as a dependent, the IRS has an “interview” online to help.
And remember: Even if your child was born at 11:59 p.m. on Dec. 31, 2022, the baby still qualifies as a dependent for the full year.
Check your child’s social security number
If you’re filing your taxes as a new parent, make sure your child has a social security number.
This isn’t usually an issue, because you’ll most likely have filled out the relevant paperwork at the hospital and X’d the box to request a social security number.
But if your circumstances are different, your baby wasn’t born in a hospital, or anything else, you’ll need to head to a Social Security Administration branch in person and fill out Form SS-5.
Donate clothes and toys
In addition to being adorable, babies excel at growing. They’re in constant need of clothes that fit and age-appropriate toys.
If you have no use for the clothing and toys your child grows out of, you should donate them. Not only can you take a charitable donation deduction on your taxes, but you’ll also help other parents out too.
Earned income tax credit
You don’t need to have children to claim the earned income tax credit, but it’s particularly useful for parents.
The maximum credit amounts you can claim are:
- 1 qualifying child: $3,733
- 2 qualifying children: $6,164
- 3 or more qualifying children: $6,935
There are two options for parents seeking education tax credits.
The American opportunity tax credit goes toward qualified expenses a student pays during the first four years of higher education. It tops out at $2,500 per year per student.
The lifetime learning credit doesn’t have a limit on years you can claim and is worth up to $2,000 per return.
Head of household status
If you’ve been filing as single but you’ve got a new child at home, you may be able to update your filing status to head of household.
The benefits of the new status are twofold: Your tax rate will usually be lower than filing as single or as married filing separately, and you’ll get a higher standard deduction to boot.
Kids can pay taxes too
It’s true, children can pay taxes, but the circumstances are a bit different. The “Kiddie Tax” pertains to unearned income for certain kids.
For example, if your child earns more than $2,300 from interest, dividends, and other unearned income, they could be subject to taxes.
You can deduct medical expenses
This goes for taxpayers without children too, but if your family spent more than 7.5% of your adjusted gross income on qualified medical expenses, you can deduct them — provided you itemize.
Per the IRS, qualified expenses include cures, diagnosis, mitigation, treatment, or prevention of disease, or payments for treatments.
Medical expenses through a flexible spending account
In terms of taxes, the biggest benefit of a flexible spending account is that your contributions reduce your taxable income.
And when it comes to your children, they can be used to cover your child’s doctor visits as well as any needed prescriptions.
Be wary of how you hire a caretaker to be sure the IRS doesn’t consider you an employer and thus be subjected to what’s commonly called the “Nanny Tax.”
If the IRS considers you an employer, you’ll need to file paperwork (like proving that they’re a citizen) and pay extra taxes. This includes adult babysitters you regularly hire.
Babysitters under 18 and grandparents don’t count. Hiring a babysitter through an agency can also help circumvent the issue.
Start a tax-free college fund
Higher education is very expensive. The good news is you can establish a tax-free savings account for your child as early as you want.
One option is what the IRS calls a qualified tuition program, otherwise known as a section 529 plan.
Contributions to the plan aren’t deductible, but there are a host of other benefits. The account will make money tax-free and the beneficiary doesn’t need to include those earnings as part of their income.
Any money that’s taken out isn’t taxed as long as it’s used for tuition or qualified education expenses.
Student loan interest deduction
The interest you paid on a student loan can be deducted and claimed as an income adjustment, so you don’t need to itemize.
The deduction is capped at either $2,500 or the amount of interest paid during the year, whichever is less.
The loan has to have been used for qualified higher education expenses for you, your spouse, or your dependent. You can’t claim the deduction if you’re filing as married filing separately.
Update your W-4
Updating your W-4 to reflect a growing family won’t change anything for the current tax year, but it will have an impact on the next filing season.
Make sure your W-4 accurately accounts for your home life. Having children can change your allowances, which determines how much is withheld from each paycheck.
The IRS provides lots of ways that parents can benefit from having children during tax season. A plethora of credits and deductions can dramatically knock down your tax liabilities and save you a bundle.
As always, given the complexity of family taxes and finding all of the tricks, it’s best to hire a tax professional to handle your return. But if you decide to do it yourself, check out our review of the best tax software for 2023.
The deadline to file your tax return is April 15.