People with children know those little ones can be pretty expensive. But there are some tax breaks available for parents.
1. Dependency deduction – most of the time a child can be claimed as a dependent in the year they were born. For 2010 the deduction is $3,650 from your income, or the amount your tax is figured on.
2. Child tax credit – this is a credit for taxpayers who have one or more children under age 17 who are dependents. The credit is $1,000 per child for taxpayers with income below $110,000 for joint filers, $55,000 for married filing separately taxpayers, and $75,000 for single taxpayers.
3. Child and dependent care credit – if you pay someone to take care of your child under age 13 so you can work or look for work, you may be able to claim a credit on 20 to 35% of the expenses. The maximum amount of credit is $3,000 for one child or $6,000 for two or more.
4. Earned income tax credit – this is available to certain low-income individuals. The amount of the credit varies with the number of qualifying children the taxpayer has and their adjusted gross income. The taxpayer must have earned income from wages, self-employment, or farming.
5. Adoption credit – taxpayers may be able to claim a credit on their tax return for qualified adoption expenses. Qualified adoption expenses include reasonable and necessary adoption fees, court costs, attorney fees, and other expenses directly related to the adoption of an eligible child. Costs for a surrogate-parenting arrangement are not eligible for the credit.
6. Children with earned income – if your child has income earned from working, they may have to file a tax return. Whether or not they have to file depends on their amount of earned income, unearned income, and gross income. See IRS Publication 501 for more information.
7. Children with investment income – if your child has investment income, it may be taxed at the parent’s tax rate if certain conditions are met. For more information, see IRS Publication 929.
8. Higher education credits – the American Opportunity, Hope, and Lifetime Learning Credits are education credits to help offset the costs of education. For more information see IRS Publication 970 or visit Bell & Company’s August 17, 2011 blog post.
9. Student loan interest – you may be able to deduct the interest you pay on qualified student loans. The deduction is an adjustment to income. For more information see IRS Publication 970 or visit Bell & Company’s August 17, 2011 blog post.
10. Self-employed health insurance deduction – if you are self-employed and pay for your own health insurance, you may be able to deduct the premiums you pay for yourself, your spouse, and any child under age 27, even if the child was not your dependent.