6 Tax Deductions for Parents

Welcome to the thrilling world of tax credits and deductions for parents (Yes, I said thrilling - stay with me here). As a parent, you're probably juggling a thousand things at once, from diaper changes to college funds, and let's not forget about trying to find a moment for yourself.

In 2023, the tax landscape for parents has some intriguing twists and turns (think of it as a theme park ride, but with less screaming). Understanding these can mean more money in your pocket, which is always a welcome addition, especially when you feel like a 24/7 ATM for your lovely offspring.

So, let's dive into the world of tax credits and deductions. I promise to make it as painless as possible – and maybe, just maybe, a tad entertaining.

Want the key takeaways? 

• In the tax year 2023, parents can benefit from various tax credits. The Child Tax Credit offers up to $2,000 for each qualifying child, reducing your tax bill directly. 
• For those with childcare expenses for children under 13, the Child and Dependent Care Credit may apply. 
• Low to moderate-income earners could be eligible for the Earned Income Credit (EIC). 
• Parents who have adopted a child can utilize the Adoption Credit to mitigate certain adoption-related expenses, including legal costs.

What is the difference between a tax exemption and a tax credit?

In the intricate dance of tax season, two partners often get confused: tax credits and tax deductions. They might sound like twins, but they're more like cousins - related but with their own unique quirks.

What's a Tax Credit?

Imagine a tax credit as a direct discount on your tax bill. If you owe $3,000 in taxes and have a $1,000 tax credit, your tax bill drops to $2,000. It's like having a gift card for your taxes. Some credits are refundable, meaning if your tax bill drops below zero, the government pays you the difference. Others are non-refundable, so they're like a 'use it or lose it' coupon.

And a Tax Deduction?

A tax deduction, on the other hand, reduces your taxable income. Think of it as a discount on the income you report to the IRS. For instance, if you earn $50,000 and have a $1,000 deduction, you only get taxed on $49,000. It's less direct than a tax credit, but still quite handy. Deductions lower the amount of income you're taxed on, which can subsequently lower your tax bracket.

Tax deductions vs Tax Credits: Similarities and Differences

Both credits and deductions lower your overall tax burden, but in different ways. A credit is like skipping ahead in line, while a deduction is like shrinking the line itself. Credits usually have a more significant impact on your tax bill than deductions, dollar for dollar. This is because they reduce your tax liability directly, rather than just lowering your taxable income.

Which is Better?

It's like asking whether a coffee or a nap is better for an energy boost – it depends on the situation. Credits generally offer more savings, but deductions can be beneficial too, especially if they bump you down to a lower tax bracket.

In essence, understanding the distinction between tax credits and deductions is like knowing the difference between a latte and a cappuccino – the details matter, and they can definitely impact your day (or in this case, your tax return). So, next time you're sifting through tax forms, remember this distinction. It might just be the secret ingredient to a more satisfying tax season.

What are all tax exemptions and credits can I take as a parent?

Ooo great question– there are a ton of ins and outs when discussing tax breaks, but the main ones parents are curious about are these;

1. Dependent Exemption
2. Child Tax Credit
3. Child And Dependent Care Credit
4. Earned Income Tax Credit
5. Adoption Credit
6. Higher Education Tax Credit And Student Loans

What is the dependent exemption?

The dependent exemption was a tax provision that allowed taxpayers to reduce their taxable income for each qualified dependent, typically a child, they supported.

Before 2018, children under 19 years old (or 24 if students) typically qualified as dependents, allowing parents to claim the dependent exemption. This exemption reduced taxable income, potentially lowering tax bills. 

Permanently disabled children had no age limit for qualification. From 2018 onward, this exemption was replaced by credits like the enhanced Child Tax Credit. Parents can adjust their W-4 forms at work to reflect these changes, potentially reducing the amount of tax withheld from their paychecks.

Enter The Child Tax credit

The child tax credit is a tax benefit (or credit–duh). ​​The Child Tax Credit directly reduces your tax bill on a one-to-one basis. For 2023, the credit is $2,000 per qualifying child, which can notably decrease your tax liability, especially with multiple children. 

Eligibility criteria include the child being under 17, your relation to the child (including direct descendants and siblings), dependency status on your tax return, U.S. citizenship or residency, and more than half-year residency with you.

Also this is only for those who meet certain income requirements. Namely– if your adjusted gross income exceeds $400,000 for people who are married and filing jointly, or $200,000 for all other tax filing statuses. 

For each $1,000 your adjusted gross income exceeds the limit (rounded up to the nearest $1,000), the total potential Child Tax Credit amount is reduced by $50 until it is completely gone.

Here’s the full eligibility for The Child Tax Credit. 

Next is the Child And Dependent Care Credit

The Child and Dependent Care Credit is designed to aid working individuals by offsetting costs for caring for a child or a dependent with disabilities. This credit is especially valuable as it directly reduces your tax bill dollar-for-dollar, unlike a tax deduction which only lowers taxable income. 

While many tax breaks have income limits, the Child and Dependent Care Credit is generally available regardless of income, although it does phase out at higher income levels. In 2021, for instance, this credit was not available for taxpayers with an adjusted gross income over $438,000.

Here’s the rules for this credit, there are limits to who you paid for the care. It can’t have been:

• Your spouse
• A parent of the child
• Anyone who is already being claimed as a dependent on your taxes
• Another child of yours who is 18 or younger

A credit for the lower earners–The Earned income Credit

We already talked about the Child tax credit already and for those who are low to modest  earners, this ones for you. What is the earned income credit?

Its a welcomes tax break for lower income individuals and families. And it’s pretty generous if you ask us. For starters, you need to file as an individual or jointly if married. Having valid Social Security numbers for yourself, your spouse, and any qualifying kids is a must. For those without kids, you should be between 25 and 64 years old and not dependent on someone else, with over half the year spent in the U.S. 

The EIC isn't just for low-income earners; it varies with income, filing status, and dependents. For instance, in 2024, a married couple with three kids earning up to $63,398 could get up to $7,830. Even those without kids might snag up to $600. It's always a smart move to check if you're eligible for the EIC each year—after all, who doesn't like a little extra cash from the IRS?

Adoption Tax Credit

Now the subject of adoption is sort of a two fold benefit. 

On one hand you get a tax credit for qualified adoptions. On the other hand you also get another tax credit for any qualified expenses you paid out to adopt an eligible child. The maximum limit is $15,950 per child (for 2023). And it can over:

• Eligible adoption fees
• Legal costs like court fees and your lawyers fees
• The travel expenses (meals, hotels, etc.)

The Adoption Credit and Exclusion in 2023 have specific financial limitations and qualifications:

• Income Limitation: Based on modified adjusted gross income (MAGI). For 2023, phaseout starts at $239,230 and ends at $279,230.
• Dollar Limitation: The maximum credit is reduced by any previous claims for the same adoption effort.
• Combining Expenses: Expenses from an unsuccessful adoption can be combined with those of a successful one in subsequent years.
• Separate Application for Credit and Exclusion: They apply separately, and you must claim the exclusion before the credit. Expenses used for exclusion can't be claimed again for the credit.

For more info you can read up on it directly on the IRS website, which is a super fun time (I’m joking, it's like Windows 95 in there). 

Tax benefits for Parents: Higher Education and Student Loans

As if raising them, feeding them and basically turning them into decent humans wasn’t expensive enough. College is a whole other (expensive) beast. 

However, parents supporting their children's higher education can take advantage of specific tax credits and deductions:

• Higher Education Tax Credits:
  • American Opportunity Tax Credit (AOTC): Available for up to four years per student.
  • Lifetime Learning Credit (LLC): No limit on the number of years it can be claimed, as long as there are qualified higher education expenses.
  • Qualified Expenses: Include tuition, enrollment fees, and school materials. Personal living expenses and transportation are not covered. Income limits apply.
• Student Loan Interest Deduction:
  • Deductibility of Interest Payments: Allows parents to deduct interest paid on qualified student loans.
  • Income Limits and Qualifications: The student must have been enrolled at least half-time in a degree program, and loans must originate from a qualified lender, not a relative. Income limits vary based on filing status.

Common Parent Tax Questions Answered