Federal and state tax laws provide many tax credits and deductions for having children. One of the most common tax benefits for children includes the dependency exemption, or the ability to claim children as dependents on your tax return. Keep in mind, however, that if you have a child with a person to whom you are no longer or never were married, your divorce and/or paternity decree may spell out which parent gets to claim the child as a dependent on his or tax return. If there is no court order in place that deals with this issue, the parent who has custody of the child generally gets to claim the child, unless the parents agree otherwise. Plus, if you are a non-custodial parent, and you are going to claim your child as a dependent on your tax return, the custodial parent must sign IRS Form in order to permit you to legally claim the child.
Other common tax benefits for people with children include the child care credit, and dependent care accounts, both of which are related to childcare costs that you pay for your eligible children, including the costs of daycare, preschool, and nanny services. The child care credit gives you a tax credit of 20% - 35% of the first $3,000.00 in child care costs that you pay per child per year. The exact amount of your tax credit is dependent upon your adjusted gross income (AGI”), and the amount of your eligible child care expenses, and phases out when your AGI reaches a certain level.
If your AGI is relatively high, you are likely to benefit more from dependent care accounts, which are similar to pre-tax 401(k) accounts offered through your employer. Not all employers offer these plans, but it is a great way to reduce your child care expenses if available, although there are certain contribution limits. Usually, you sign up for the account once a year, and decide how much money you want to put into the account, which is then deducted from your paycheck on a pre-tax basis. Once you have a child care expense, you fill out a form in order to get reimbursement for that expense from your account. Be cautious, however, about the amount of money that you put in your dependent care account; if you don’t use the entire amount during that year, you will lose any money that remains in your account.
The only other limitation on these tax benefits for child care expenses is that the total amount of your credit must be less than your earned income, or your spouse’s earned income, for the year. However, there are some exceptions to this rule if your or your spouse is disabled or a full-time student.
In order to be eligible for either the child care tax credit or the dependent care account, you must meet certain criteria. The child for whom child care expenses are incurred must be your biological, adopted, step or foster child, and must live in your home for more than half of the year. Additionally, your child must be younger than 13 or permanently disabled, and you (and your spouse, if married) must work or go to school full-time, plus have earned income for the year.
The information on this page is meant to provide a general overview of the law. The laws in your state and/or city may deviate significantly from those described here. If you have specific questions related to your situation you should speak with a local attorney.