Tax Deductions for Children

Tax Deductions for Children

Raising a child costs more than $135,000 from birth to age 18. Between medical costs, clothing, food, child care and entertainment, having a child can be a strain on the bank account. Parents do get a financial break in one area, however. Having children can drastically lower the family's tax liability, especially in families making $40,000 or less per year. Taking advantage of these tax breaks can offset the cost of raising a family.

Child Tax Credit

Tax credits are deducted from the amount of taxes owed. They are taken at the end of the tax form, after income is calculated and the tax liability is determined. For example, if a couple who is married filing jointly had a taxable income of $27,000 the tax liability would be approximately $3,200. A tax credit would lower this liability.

The child tax credit offers parents a credit of $1,000 per dependent child. In the above example, if the couple had two children, they would earn a tax credit of $2,000. This would lower their tax liability to $1,200.

The child tax credit is refundable. This means if a taxpayer has two dependent children but only owes $1,500 in taxes, he is eligible to get a check for the remaining $500 from the government. There are some conditions on this refund that are based on adjusted gross income but most people qualify for this type of refund.

A child must be under the age of 17 and be a legal resident or citizen of the United States to qualify for the credit. In addition, the person claiming the credit must provide more than fifty percent of the child's support and be related to the child or be the child's legal guardian, such as a foster parent.

Earned Income Credit

The Earned Income Credit (EIC) gives families who make under $50,000 a tax credit that lowers tax liability. Like the child tax credit, the EIC is refundable. In order to claim this credit without children, a couple must make less than $19,000 per year. However, a couple with two children can earn up to $47,000 and claim this credit.

Having children also drastically increases the amount received from the EIC. In 2011, a married couple with no children that earned $14,780 would have received $303 in credit. However, if the same couple had two children, their EIC would have jumped to $5,112. Remember, this credit is refundable so if the couple only owed $800 in taxes, they would receive a refund check for over $4,300.

The EIC does not increase after two children. For purposes of this credit, there is no benefit to having more than two children. Children must be under 17, live with the taxpayer earning the credit and meet all the IRS guidelines for a "qualifying child," which change slightly each year with the new tax code.

Exemptions and the Child Care Credit

Each dependent claimed on the tax return earns an exemption. An exemption is a set amount of money that is not taxed. In 2012, each exemption was worth $3,800. Therefore a family of four would have an exemption of $15,200. This means that if the family earned $40,000 for the year, only $24,800 of it would be taxable. There is no limit to the number of dependents a taxpayer can have, as long as there is proof that the child is, in fact, cared for and supported financially by the taxpayer.

Expenses related to babysitters or daycare qualify for a Child Care Credit. This credit is only valid for child care while parents are at work. Expenses of up to $3,000 for one child or $6,000 for two or more children will qualify for the credit. The credit is not allowed if the child care provider is dependent sibling to or the taxpayer's own child. That means if your fifteen-year old daughter watches her younger siblings after school and you pay her, it is not a qualified child care expense. You must include the child care provider's business identification number or Social Security number to take the credit, which means that the babysitter must report the income and pay taxes on the amount.