Tax Credits Available for Families with Children
Family matters are also tax matters to a large degree. As soon as dependents are added to the household – normally children – several tax credits may come into play. Together, these credits can significantly reduce a family’s tax burden, but only if they’re leveraged properly.
A tax preparation and planning expert can help families with that. Professional Houston tax experts help families maximize their tax deductions and credits and minimize their tax burden as a result.
Here, we’ll address the most notable tax credits relevant to families, and how taxpayers may qualify for them.
The Child Tax Credit: Amounts and Qualifications
The Child Tax Credit (CTC) was signed into law in 1997 and remains a major source of tax relief for families. Here are the CTC details for the 2022 and 2023 tax seasons:
- Maximum credit amount – The maximum credit amount for the CTC is $2,000 per qualifying child.
- Maximum refundable credit amount – The maximum refundable credit amount is $1,500 per qualifying child. If the taxpayer’s tax burden is below this amount, the remaining portion of the CTC credit is converted to a tax refund.
- Income phaseout threshold – The phaseout threshold is based on modified adjusted gross income (MAGI). For taxpayers filing single, head of household or married filing separately, the maximum credit amount is reduced by $50 for every $1,000 beyond $200,000 in MAGI. For married filing jointly, the phaseout begins at $400,000 in MAGI.
Certain qualifications must be met before the credit can be applied to a tax return. Those CTC qualifications include:
- Age – The child must be under 17 by the end of the calendar year for which the CTC is being applied. For example, to claim the CTC on a 2023 income tax return, the child must be under 17 on December 31, 2023.
- Dependent status – The taxpayer must be able to claim the child as a dependent on their tax return.
- Relationship to child – The child must be a son, daughter, stepchild, foster child, sibling, half-sibling or step sibling. If the child is a descendent of any of the above, they also qualify.
- Residency and financial support – To claim the CTC, the taxpayer must have provided at least half of the child’s financial support during the year. Also, the child must have lived with the taxpayer for at least half of the year, though there are exceptions to this rule.
If a dependent under your care does not qualify for the CTC, they may still qualify for a $500 credit (maximum). This is a per-dependent credit, and the dependent does not need to be under 18 to qualify.
The Child and Dependent Care Credit: Amounts and Qualifications
The Child and Dependent Care Credit (CDCC) is frequently confused for the Child Tax Credit, but the CDCC is aimed at parents who must pay for child or dependent care services in order to work or seek employment.
To be considered a qualifying dependent for the CDCC, they must be one of the following:
- A child under 13 years of age.
- A spouse who is unable to take care of themselves (physically or mentally) and lives half of the year with the taxpayer.
- Another person who is unable to take care of themselves and could be claimed as a dependent on the taxpayer’s return.
There are rules determining which childcare expenses qualify through the CDCC. Qualifying expenses include:
- Any childcare outside the home for a child who spends at least eight hours a day in the taxpayer’s residence.
- Preschool and pre-K care.
- Before and after school care.
- Day camps and similar programs – even those that offer specialized activities.
- Household services, including cooks, maids, babysitters, and cleaners, if services were partly for the care of the qualifying dependent.
- Employment taxes, meals, and lodging for household employees caring for the qualifying dependent.
- Additional costs other than care that are included with care and cannot be separated (education, food, transportation).
Nonqualifying expenses include:
- Kindergarten classes, including kindergarten classes through a private school.
- Overnight camps.
- Child support payments.
- Transportation provided by the parent to a childcare location.
- Expenses reimbursed by a state social service agency not included in income.
The CDCC amount ranges from 20 to 35 percent of either $3,000 (for one dependent) or $6,000 (for two or more dependents). If qualifying childcare expenses are less than this amount, that number is used instead. Through the CDCC, then, the maximum credit amount is $1,050 (for one dependent) or $2,100 (for two or more dependents).
The exact credit amount depends on the taxpayer’s adjusted gross income (AGI). Between $0 and $15,000 in AGI, the taxpayer may claim the maximum (35 percent). The amount is slowly lowered to 20 percent between $15,000 and $43,000. Taxpayers with an AGI greater than $43,000 may claim 20 percent.
Note that the CDCC is not refundable. It may reduce the taxpayer’s tax burden to zero but will not provide a refund if the credit exceeds what’s owed.
The Earned Income Credit: Amounts and Requirements
The Earned Income Credit (EITC) is designed to help low- and middle-income families offset their taxes with a large income tax credit. The EITC amount depends on the number of children in the household and the taxpayer’s filing status. Here are the details:
- Amount – In a household with no children, the maximum EITC is $600. With one child, the maximum is $3,995. For two children, the maximum is $6,604 and for three or more children, the maximum is $7,430.
- Filing status and AGI limits – AGI limits depend on the taxpayer’s filing status. For single and head of household filers, AGI limits for the EITC are $17,640 (no children), $45,560 (one child), $52,918 (two children) and $56,838 (three or more children). For married couples filing jointly, the AGI limits are $24,210 (no children), $53,120 (one child), $59,478 (two children) and $63,398 (three or more children).
- Requirements – To qualify for the EITC, the taxpayer and their spouse must have valid social security numbers. Any claimed children must also have valid social security numbers.The taxpayer must be a U.S. citizen or legal resident alien for the entire year. The taxpayer must not be claimed as a dependent on another tax return. Finally, the taxpayer must not file a tax return related to foreign income, and the taxpayer’s investment income must be $10,300 or less.
The Adoption Credit: Amounts and Qualifications
Taxpayers may claim a credit or employee benefit income exclusion if they paid for adoption related expenses during the tax year. Here are the details for 2022:
- Amount – The maximum credit or exclusion is $14,890. This limit applies to the total spent across all years during which a single adoption attempt was made.
- Qualifying expenses – Qualifying expenses include adoption fees, attorney fees, court costs, re-adoption in state court, and any travel expenses, meals and lodging expenses incurred while facilitating adoption proceedings.
- Nonqualifying expenses – Nonqualifying expenses include costs incurred to adopt a spouse’s child, expenses paid or reimbursed by an employer or governmental agency, expenses incurred for surrogate parenting, or expenses claimed as a credit or deduction under another tax rule.
A Couple of Educational Tax Credits Also Worth Considering
There are also a couple of education-focused tax credits that may be claimed for a dependent student. Those credits include:
- The American Opportunity Tax Credit – The American Opportunity Tax Credit (AOTC) may be claimed for the first four years that a dependent student pursues postsecondary education for at least half time. The maximum credit is $2,500 every year for the first four years. Up to 40 percent of the AOTC is refundable.
- The Lifetime Learning Credit – The Lifetime Learning Credit (LLC) may be claimed for as many years as the student is in school. The credit amount is 20 percent of the first $10,000 incurred every year (a maximum of $2,000 annually).
A Reputable Houston Tax Expert Can Help Families Secure the Available Tax-Saving Credits
Tax credits represent a major form of financial relief for many American families. As such, it’s extremely important for taxpayers to review their tax credit options and determine how to maximize their benefits.
An experienced Houston tax professional can help families put together their tax returns and identify an optimal tax preparation strategy to maximize savings.
- Employee or Independent Contractor: Determining Worker Status and Taxation Rules - November 8, 2023
- Divorce and Taxes: Tax and Alimony Considerations - November 3, 2023
- Charitable Contributions: How to Deduct and What Qualifies - October 20, 2023