As a parent, you know that raising a child can be expensive. Between the cost of diapers, food, and clothing, it can be hard to make ends meet. However, there are several tax credits available that can help ease the financial burden on parents.
Here are five tax credits that can save parents big money.
Child and Dependent Care Credit
The first tax credit is the Child and Dependent Care Credit. This credit is available to parents who pay for child care while they work or look for work. It was originally created in the 1970s to help parents. The credit can be worth up to 35% of childcare expenses, with an amount of $2,100 for one child and $4,200 for two or more children if the parents are earning maximum tax credits of $4,000 and $8,000.
Earned Income Tax Credit (EITC)
The Earned Income Tax Credit (EITC) is a credit for individuals earning low to moderate incomes and is determined by factors such as family size, income limits, and filing status, both from employment and investments. Even if your children do not qualify, you can still apply for EITC. However, parents with qualifying children must have worked and earned an income under $59,187, have investment income below $10,300, possess a valid Social Security number by the due date of the tax return, be a U.S. citizen or a resident alien for the entire year, and not file Form 2555 for foreign earned income exclusion.
Child Tax Credit
The Child Tax Credit is another option for parents. This credit is worth up to $2,000 per child, and it starts phasing out at higher income levels. However, the American Rescue Plan Act of 2021 has temporarily increased the Child Tax Credit to $3,000 for children under age 6, and $3,600 for children aged 6 to 17 in 2021.
American Opportunity Tax Credit (AOTC)
Finally, the American Opportunity Tax Credit (AOTC) can help parents save money on their taxes. This credit is available to parents who pay for their child’s higher education. The credit can be worth up to $2,500 per eligible student, and it can be claimed for the first four years of post-secondary education.
529 State Tax Plans
529 plans are state-run savings accounts that offer tax advantages and can be used to save for a child’s college education. All states offer these plans, except Wyoming.
529 state tax plans come in two forms: savings plans and prepaid tuition plans. Each state offers different options and you don’t have to be a resident of a state to take advantage of its 529 plan. Therefore, it’s important to conduct thorough research and consider factors such as tax breaks, fees, investment strategies, and the type of plan offered by each state before making a decision.
By taking advantage of these credits, you can save big money on your taxes and put more money back in your pocket. Be sure to consult with a tax professional or use tax preparation software to ensure you are getting the most out of these credits.