The Parent Tax Credit

Most parents can take advantage of at least one form of parent tax credit when filing to help soften the expense of raising a child.

This article provides an overview of some of the benefits that are available to parents in the form of tax credits.

You have already gone through what may have been the happiest, yet longest day of your life — the day your little angel (or monster, depending on the hour of the day) came into the world. However, as the euphoria fades away, the reality starts to sink in. When it comes right down to it, being a parent can be quite expensive. Not only do kids require new furniture, food, and healthcare, but they will also need more clothes and diapers than you can probably imagine right now.

Not to fear, though, the federal government has your back when it comes to the expenses related to your child's care. This article will focus on the parent tax credit, which is really two different kinds of tax credits: the dependent exemption and the child tax credit.

The Child and Dependent Care Tax Credit

You can get 20-35% for up to a $3000 credit for child care costs if you fulfill the following requirements:

• You must have a child under 13 years old
• You must file jointly if you are married 
•  Both you are your spouse must have earned income. This requirement doesn’t apply if you are disabled or a full-time student.
• You will also need to provide the childcare provider’s address, name, and TIN number. 

You should note that this credit is not refundable, meaning you won’t get a refund from the credit. 

Child Tax Credit

In addition to the dependent exemption, you may also be able to claim a child tax credit as another parent tax credit. This tax credit is designed to help parents that have low incomes support their families, and is therefore only available to people that make less than a certain amount of money.

As it currently stands, the base tax credit is $2,000 for each qualifying child (under the age of 17), but this amount is reduced if your reported income exceeds a certain amount. In 2020, the threshold income level for a joint return was $400,000. The amount you can get reduces as your income increase. But generally,  joint filers may be able to claim a partial credit if their income is less than $80,000 more than the $400,000 limit. 

To make this math easier to understand, it is helpful to look at a few examples.

First, let us assume that Fred and Amy have three children under the age of 17, and their reported income on their joint return was $200,000. This income is below the threshold of $400,000, which means that Fred and Amy will be able to claim a $6,000 tax credit on their income taxes (3 children x $2,000 tax credit per child).

Now, let us assume the same situation as above, except that now Fred and Amy report $470,000 as their income on their joint return. Because their income is greater than the threshold amount, Fred and Amy will not be able to claim the full $6,000 child tax credit. Instead, they will have to reduce the credit by the amount their income exceeds the threshold income amount. Look into the IRS instructions of Form 1040 worksheet to determine your exact credit amount when your income surpasses the limit.

You can figure out the amount of child tax credit you can claim by filling out Schedule 8812 of Form 1040.

Have an Attorney Help You with Your Parent Tax Credit Questions

Parents, especially those with small children, are always busy and often too fatigued to study up on our complicated tax code. If you have questions about the parent tax credit or any other tax issues, you may want to speak with a local tax attorney.