According to Matt Becker, founder of Mom and Dad Money, there are several credits, deductions and exemptions for your growing family.
Everyday costs: As of 2014, the IRS gives you a $3,950 exemption for each child, which means you can lower your income by that amount for tax calculation purposes. For example, if you and your husband earn $100,000, you could calculate your taxes based on an income of $96,050.
Generally, you can take an exemption for your child if they meet the following criteria:
-They are under 19 years of age, or are a full-time student under the age of 24
-They are not filing a joint return or claiming someone else as a dependent on their own return
-The child lives with you (with some exceptions) and you provide more than 50% of his or her financial support
-No one else is claiming the child as a dependent
After that, you may be eligible for an extra $1,000 tax credit for children under 17. Tax credits work like gift cards from the IRS. After calculating how much you owe, treat the credit like cash and wipe its amount directly off your tax total. The remaining balance is what you'll pay the government.
This tax credit isn’t for everyone. Married people filing jointly with an income of $110,000 and below and single parents with an income of $75,000 and under can claim the full $1,000 amount. If you make more, the dollar amount of the credit drops by $50 for every additional $1,000 you earn.
Low-income earners may be eligible for a special additional child tax credit if their credit amount is greater than the tax they owe. This could trigger a refund.
The Earning Income Tax Credit is a refundable tax credit available to anyone, but your eligibility is based on both income and family size. As your family grows, it may be easier to qualify.
Childcare expenses: Have a nanny or use a daycare? You can set aside $3,000 of your childcare costs ($6,000 if you have two or more kids). Then, you can multiply that amount by 20 to 35 percent, depending on your income. (For the full 35 percent you need to earn under $15,000. After that as your income rises the percent you can take goes down.) The answer is the amount of money you can slice from your tax total. The best part: This credit is for everyone. There’s no income ceiling.
Medical expenses: Medical expenses are only deductible if they add up to more than 7.5 percent of your income. Benefits, however, are the perks of having a job, and some companies offer Flexible Spending Accounts. That means your employer can put up to $5,000 of your salary into an account for you to use for medical expenses. (Think doctor copays, eye exams, and over-the-counter drugs.) The catch: This may interfere with your ability to take the childcare credit, so look at your financial situation from both angles — getting some professional tax help probably wouldn’t hurt. Also, these accounts are usually use-or-lose, which means if there’s money left in there when the year ends, it’ll evaporate unspent.
If you have access to a Health Savings Account you can make pre-tax contributions whether or not you have kids, like with a 401(k), and any healthcare expenses can be withdrawn tax-free. This can be a great way to make some of those medical expenses a little more affordable. And unlike a FLEX account, the money is yours and will simply rollover if you don't use it all within the calendar year.
If you're adopting, you may be able to take a credit of up to $13,190 for your expenses related to the adoption.
College savings: Some states will allow you to deduct contributions made to a 529 college savings plan for state income tax purposes. Here's a good resource to see if your state does so.
In any case, both 529s and Coverdell Education Savings Accounts allow you to save money for education that can eventually be withdrawn tax-free. Additional help for college expenses can be found with the American Opportunity Credit (up to $2,500 per student per year for undergraduates) and the Lifetime Learning Credit (up to $2,000 per student per year for graduate students).
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