Mountains of groceries. Trips to the clothing store. After-school activities.
As much as you love them, kids can seem like an endless drain on your checkbook. That is, until tax season. It’s the one time of year when children can actually put more money in your pocket, thanks to several parent-friendly credits and deductions.
Unless you’re familiar with the intricacies of the IRS code, however, it’s easy to miss tax breaks that could save you serious cash. Here are some of the most common, and costly, mistakes that parents make when filling out their return.
1. Forgetting About the Dependent Deduction
Neglecting to use the deduction for dependents can be an expensive blunder. For the 2017 tax year, it reduces your taxable income by $4,050 for every taxpayer, spouse and qualifying child in your household. So if you’re in the 25 percent tax bracket, claiming one child will cut your tax bill by just over $1,000.
Just had a baby? That little bundle of joy provides a full year’s deduction, even if she was born in December. So it’s helpful for the newest of parents, too.
This is the last year for which you’ll be able to claim it, though. The Tax Cuts and Jobs Act removes the dependent deduction in 2018, in part because the standard deduction is being nearly doubled. Most families will actually see bigger refunds as a result, though larger families will miss the per-person discount.
2. Skipping the Child Tax Credit
If you have a child under the age of 17 living in your home, you can also claim a child tax credit of up to $1,000 per person, depending on your income. You can even use it for step-children, adopted children, and foster children, as long as they lived with your for at least half the year.
Unlike deductions, credits reduce your tax bill on a dollar-for-dollar basis. So many families can trim their tax bill by the full $1,000.
In 2018, parents will get an even bigger break. The recent tax bill doubles the credit next year, so income-eligible parents will get to claim a $2,000 credit.
3. Not Using the Child Care Credit
As a lot of parents know first-hand, paying someone to care for son or daughter during the day can be an expensive proposition. Fortunately, the child care credit can help ease the pain. As long as you have a dependent who’s under age 13 – or one who’s physically or mentally disabled – you qualify.
Alas, you have to use a somewhat convoluted formula to calculate its value. According to IRS rules, the credit is worth between 20 and 35 percent of the first $3,000 of expenses for one child, or up to $6,000 for two or more children. Your adjusted gross income determines what percentage you can claim.
Let’s suppose you have two kids for whom you spent $10,000 on child care last year. And because of your income, you can claim 20 percent of qualifying costs. Only the first $6,000 of your costs are eligible, so claiming the credit cuts your tax bill by $1,200 ($6,000 x 20 percent).
Keep in mind that you don’t need to send your child to a daycare to take advantage. You can also claim a credit for day camp, pre-school and even babysitter costs. You’ll need the provider’s tax ID or Social Security number to claim the credit, so make sure to keep careful records.
4. Filing as ‘Single’ Instead of ‘Head of Household’
Filing as a single taxpayer may seem like the obvious option if you don’t currently have a spouse. But that decision could unwittingly lead to a bigger tax bill.
The better choice for unwed and divorced dads: completing your return as a “head of household.” To use the designation, you need to have a child who lived with you for at least six months and pony up more than half of the household costs. That includes everything from a mortgage to utility, food, and insurance bills.
Receiving financial support from a former spouse doesn’t inhibit you from filing as head of household, as long as you still covered the lion’s share of total expenditures.
Missing Out on the Adoption Credit
Adopting a child is usually a lengthy, not to mention expensive, process. The adoption credit certainly helps, providing up to $13,570 of relief for qualified expenses in 2017.
The income-based credit is non-refundable, so if its value exceeds the amount of taxes you owe, you won’t get the difference in the form of a refund. However, you can carry forward the unused portion for up to five years, enabling you to spread out the benefit.
In order to maximize your credit, however, you’ll need document how much you spent on the adoption. Since it’s a journey that can take years to complete, that’s no easy task. Needless to say, you’ll want to keep every receipt you can from the start.