June 24, 2013

Couples are often struggling to make ends meet. Add a few kids to the mix, and the expenses become endless. It seems that there is a never-ending stream of costs associated with having kids: diapers and childcare, clothing, and everyday essentials. Before you know it, field trips, extra-curricular activities, and school events add to that tally.

The Wall Street Journal estimates that the average family will spend around $300,000 raising a child to adulthood, and that number doesn’t even include college costs. Fortunately, there are some kid-friendly tax breaks that will help you recoup a little of your money, or at least get your tax bill down to a manageable level each year.

Child and Dependent Care Credit

If you have children under the age of 13 this tax credit can help with child care costs–but there are a few rules involved. To claim this credit, you must be either working or looking for a job during child care. The cost of summer camp or other programs can also be included.

Run a small business and work for yourself? You can still claim this credit. Keep good records by tracking your hours, income and expenses, and file them in case the IRS ever questions the deduction. Under normal circumstances, this shouldn’t raise any red flags. The credit is worth as much as $3000 for one child or up to $6000 for more than one child. Note: If your family earns more than $43,000 a year, you will only be allowed to claim 20 percent of the deduction.

Adoption Credit

If you are thinking about adopting a child, you can drastically reduce the cost of adoption with the Adoption Credit. In 2012, the adoption tax credit for costs directly associated with adoption was $12,650. Although you can only claim as much as you owe in taxes, you can space the deduction out and claim part of it the following year. This is a large credit and the IRS will likely look at the return closely. It is a good idea to keep meticulous records and a paper trail, and have a tax specialist look over your return. When claiming this deduction, you must file with a paper return instead of an electronic one.

Child Tax Credit

If your child is under 17, you probably qualify for up to a $1,000 Child Tax Credit. Read our checklist to see if your child qualifies. You can claim the credit for each child in your household who is eligible.

Earned Income Tax Credit

For those with a low income, the Earned Income Tax Credit (EITC) can really help come tax-time. If you qualify, you can earn a credit of $3,169 for one child, $5,236 for two children and $5,891 for three or more children. As of 2012, the income for married filing jointly with one child cannot exceed $42,130. The amount goes up slightly if you have more children. This information can change a bit from year-to-year, so it’s always best to refer back to IRS publication 596 or contact Optima Tax Relief  for the latest updates. In addition to claiming this credit on your federal return, some states also offer an EITC credit.

Hire Your Child

If you own your own business and they’re under 18, you can further reduce costs by hiring your child to work for you. Most of the time, you won’t have to worry about holding out FICA or Social Security from their wages. The IRS tends to watch this carefully, so be sure the child is old enough to perform the work assigned, that the work is necessary to your business and that you are paying a fair wage (minimum wage is a good bet). Pay your child with a check and not cash so that you have a paper trail if ever questioned. That check can go into a savings account for your child, a Roth IRA in his name or into a special fund that pays out when he reaches adulthood.

Have your child fill out a W-4 before employment because you’ll need to send him a W-2 at the end of the tax year. According to MarketWatch, your child can earn up to $6,100 a year as of 2013 without worries of owing federal taxes. This is another way to shelter some of your income while helping your child save for college or a rainy day fund.

Higher Education

Once your child turns 18, you’ll lose the Child Tax Credit and many other tax breaks. But if you are still supporting your teenager by paying for expenses like food, rent, and/or their college education, there’s good news–you can recoup some of these costs.

The American Opportunity Tax Credit, good through 2017, allows you to claim $2500 per child per each of the first four years of his college career. Your adjusted gross income must be less than $90,000 for single filers and $180,000 for those filing as married-filing-jointly. You may also be able to claim some of the interest paid on student loans with the Student Loan Interest Deduction.

These kid-friendly tax credits can greatly reduce your tax bill at the end of the year. You’ve got enough expenses as it is, so take advantage of these deductions whenever possible.  Although most won’t send up red flags, the IRS does keep a careful eye on some of these deductions because others have abused the system. Don’t let that scare you off from claiming a deduction you are qualified to take.