Let’s face it, kids are expensive to raise. From childcare costs to college expenses, it seems like more money is going out than in each year. For parents, it’s especially important to take advantage of as many tax breaks as possible. That’s why we’ve put together this short list of 8 tax-saving tips for working parents that can help you save money this tax season.
1. Child Tax Credit
The Child Tax Credit (CTC) is one of the biggest tax credits for parents. Although it’s not as large as it was for the 2021 tax year, it can still lower your tax bill dollar-for-dollar by up to $2,000 per eligible child. And best of all, it’s refundable. If the credit exceeds your tax liability, you could be eligible for a tax refund of up to $1,500 per child.
CTC Qualifications Overview
To qualify for the full tax credit, your modified adjusted gross income (MAGI) must not exceed $200,000 (or $400,000 if married and filing jointly) and your child must meet the following qualifications:
- Be 16 or younger at the end of the tax year
- Be your own child (natural, step, adopted, or foster) or sibling (full, half, or step), or be a descendant of either of these (niece, nephew, grandchild, etc.)
- Must be claimed as a dependent on your tax return
- Be a U.S. citizen, national, or resident alien
- Must live with you for at least half of the year
If your MAGI exceeds these limits, your Child Tax Credit will be reduced by $50 for every $1,000 over the phaseout limit.
2. Credit For Other Dependents
Do you have dependents on your tax return who don’t qualify for the CTC? Be sure to check out the Credit for Other Dependents (ODC), especially if your child attends college. This non-refundable credit provides up to $500 per eligible dependent.
3. Child And Dependent Care Credit
For working parents, the Child and Dependent Care Credit is beneficial if you pay for childcare expenses. This non-refundable tax credit is valued at 20% to 35% of your expenses, with a maximum credit of up to $3,000 for one eligible dependent or $6,000 for two or more.
To qualify for this tax credit, your dependent must be either:
- A dependent you claim on your tax return who is 12 or younger; or
- Your spouse (if they are unable to care for themselves and lived with you for at least half the year); or
- Any other person you claim as a dependent who can’t take care of themselves and lives with you for at least half of the year.
You must also have earned income and paid for childcare while you were working or seeking employment. Additionally, if you are married, you must both be employed (being a full-time student counts) and file a joint tax return. Childcare provided by a spouse, the parent of the dependent, or any other dependents listed on your return (including children 18 or younger) doesn’t qualify as an eligible expense.
4. Education Tax Credits
College is an enormous expense for many working parents. Thankfully, there are two education tax credits that can help soften the blow to your bank account.
American Opportunity Tax Credit (AOTC)
If you or your dependent is seeking a degree and enrolled at least half-time in an accredited post-secondary institution, you may be eligible for this partially refundable tax credit. The AOTC has a maximum value of $2,500 per eligible student and can be claimed during the first four years of undergraduate study. If the credit zeroes out your tax liability, you may receive a tax refund of up to $1,000.
There are income limits for taking the tax credit. Joint filers cannot make more than $180,000. Single filers must not exceed $90,000. Eligible expenses include tuition, textbooks, fees, and other course materials required to enroll.
Lifetime Learning Credit (LLC)
Unlike the AOTC, the Lifetime Learning Credit is non-refundable and maxes out at $2,000 per year, not per student. There is no limit, however, on how many times you can claim the LLC.
Eligible students need only enroll in one course to get a degree, an education credential, or to improve their job skills. Tuition and fees, as well as required textbooks and course materials purchased directly from the school, are considered qualifying expenses.
The income limits for the LLC are the same as those for the AOTC. If you are married and file separately, you are ineligible for this tax credit.
5. Self-Employed Health Insurance Deduction
Are you self-employed? If you pay for your own healthcare insurance, you can typically deduct 100% of any premiums paid for yourself, your spouse, and your children (26 or younger), as long as it does not exceed your self-employment income. This includes dental, vision, mental health, and long-term care premiums, even if your child is no longer claimed as a dependent. If either you or your spouse is eligible for an employer-paid plan, however, you can’t take this tax deduction.
6. Earned Income Tax Credit
The Earned Income Tax Credit (EITC) is a refundable tax credit that helps millions of low-to-moderate-income families each year. The credit amount is determined by your income, filing status, and the number of qualifying children you claim. For 2022, the credit amount ranges between $560 (no kids) and $6,935 (3 or more children). To learn more, check out our recent blog post – “Are You Eligible For The Earned Income Tax Credit?”
7. Adoption Tax Credit
Did you adopt a child during the tax year? If so, you may be able to offset some of the costs by claiming the Adoption Tax Credit. Depending on your income and qualified expenses, the maximum credit for 2022 is $14,890 per child.
Although the tax credit is currently non-refundable, you can carry over any remaining credit for up to five years. To learn more about credit eligibility and how to claim it, check out our “Who Can Claim the Adoption Tax Credit” blog post.
8. Student Loan Interest Deduction
Since most federal student loans have not charged interest since the start of the pandemic, you likely won’t be able to take this tax deduction for the 2022 tax year, unless you have eligible private loans. As an above-the-line adjustment to your adjusted gross income (AGI), the student loan interest deduction can shave off up to $2,500 and help reduce your tax liability. Similar to the AOTC and LLC, you must meet certain enrollment and income requirements to qualify, and only the following expenses are eligible:
- Tuition and fees
- Room and board
- Textbooks, and other required course materials
- Other necessary expenses (such as transportation)
If you are married and file separately or listed as a dependent on another taxpayer’s return, you cannot take this deduction. As a parent, you can’t claim the interest on your child’s student loan unless you are legally obligated to pay it.
Need Tax Help?
Dealing with tax returns can be stressful. If you need help determining which credits and deductions you are eligible to claim, or want to have a professional review your return for potential issues, give Tax Defense Network a call. We offer affordable individual tax preparation and other tax services. For a free consultation and quote, call 855-476-6920 today!