Tax Credits & Tax Deductions for Parents with Children or Dependents
Your kids can be helpful at tax time. That doesn't mean they'll sort your tax receipts or refill your coffee, but those charming children may help you qualify for some valuable tax benefits. Below are 10 tax credits and tax deductions you can claim on your tax return because of your children or dependents.
What Is a Dependent? Can I Claim a Dependent as a Tax Deduction?
The IRS defines a dependent as a Qualifying Child or Qualifying Relative for whom you can claim a tax exemption. In most cases, a child can be claimed as a dependent in the year they were born. You can only claim one exemption for each dependent.
What Is the Child Tax Credit?
You may be able to get a Child Tax Credit for each of your qualifying children under age 17. The credit is intended to offset the cost of raising children. The maximum amount you can get for each child is $1,000 for Tax Year 2016. You must file Form 1040A efile it or Form 1040 efile it to claim the credit (you cannot claim the Child Tax Credit on a 1040-EZ).
You can complete and file a 1040A or 1040 in order the claim the Child Tax Credit on efile.com. We will help you complete and efile your tax return at the lowest price, guaranteed!
If you do not benefit from the full amount of the Child Tax Credit (because the credit is greater than the amount of income taxes you owe for the year), you may be eligible for the refundable Additional Child Tax Credit.
What Is the Child and Dependent Care Tax Credit?
You may be able to claim the Child and Dependent Care Credit if you pay someone to care for your child or children under age 13 so that you can work or look for work. This credit can be worth up to 35% of some or all of the expenses you paid to the care provider, based on your yearly income and the number of children. The maximum credit for 2016 is $3,000.
What Is the Earned Income Tax Credit (EITC)?
The Earned Income Tax Credit (EITC) is a tax benefit for low-income people who work and have earned income from wages, self-employment, or farming. The EITC reduces the amount of tax you owe and may also give you a refund.
You can claim the Earned Income Credit on a Form 1040-EZ (an EZ is always free!), a 1040A, or a 1040 on efile.com. Find out why more people are choosing efile.com to efile their tax returns.
What Is the Adoption Tax Credit?
You may be able to take the Adoption Tax Credit for qualifying expenses you paid to adopt a child. These expenses include adoption fees, attorney fees, court costs, traveling expenses (including lodging and meals while away from home), and other expenses directly related to the adoption.
If you claim the Adoption Credit, you must file a 1040 Form with the required adoption-related documents (you cannot claim the credit on a 1040-EZ nor a 1040A). You can prepare and efile a Form 1040 so you can claim the adoption credit on efile.com.
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How Do I Report My Children's Earned Income? Can I Still Claim a Child on My Tax Return?
If your child has income earned from working, they may be required to file a tax return, especially if the child had tax withheld from his or her pay. In this case, you may not be able to claim your child as a dependent based on various factors:
- Your child's total earned income,
- Your child's filing status,
- Your child's age AND
- The amount of support you have provided for your child during the Tax Year
However, you could claim your child as a qualifying relative based on the factors above (limits and qualifications vary).
Can I Claim My Children's Investment Income on My Tax Return?
According to the IRS, you may be able to qualify for including your child's investment income on your tax return. Your child will not be required to file a return if you choose to do this.
You can qualify to include your child's investment income on your income tax return if you meet the following conditions:
- Your child was under 19 years old (or under 24 years old if he or she was a full-time student) at the end of the Tax Year
- Your child's total gross income was less than $10,000
- Your child's income is only from dividends and interest (includes capital gains distributions and Alaska Permanent Fund dividends)
- Your child didn't file a joint return for the Tax Year
- Your child is required to file a return (unless you qualify to include the child's income on your return)
- No federal income tax was withheld from your child's income under the backup withholding rules.
- No estimated tax payment was made for the year, and no overpayment from the previous year (or from any amended return) was applied to the current Tax Year under your child’s name and Social Security Number.
- You're the parent whose tax return must be used when applying the special tax rules for children
To apply for the election to include your child's investment income on your tax return, complete Form 8814, Parents' Election To Report Child's Interest and Dividends, and attach it to your 1040 Form (you cannot file Form 1040-EZ nor Form 1040A if you make the election). Please note that if you choose to include your child's investment income on your tax return, your tax rate may increase (in comparison of filing a separate return for your child) and you cannot claim certain deductions (such as itemized deductions).
However, under certain circumstances, a child’s investment income may be taxed at your tax rate (as a parent) if all the following factors apply:
- Your child’s investment income was more than $1,900 for the entire Tax Year
- Your child is required to file a tax return
- Your child was either:
- Under 18 years of age at the end of the year,
- Under 18 years of age at the end of the year and didn't have earned income that was more than half of his or her support OR
- A full-time student over the age of 18 and under 24 years of age at the end of the Tax Year and did not have earned income that was more than half of his or her support
- At least one of the child’s parents was alive at the end of the year AND
- The child didn't file a joint return for the Tax Year
If all of the factors above apply to the child with investment income and you don't or can't choose to include the income on your return, Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,900 efile it, must be completed and attached to your child's Form 1040A or 1040 Form(Learn which Form 1040 to file here).
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What Are the American Opportunity & Lifetime Learning Tax Credits?
They are education tax credits that can help offset the costs of higher education by reducing your federal income tax dollar-for-dollar. You may be able to claim one of the two different student tax credits:
- American Opportunity Credit: You can claim this credit if your child is in his or her first four years of post-secondary school. The maximum amount you can claim is $2,500 per eligible student, per year. This credit has been extended through 2017.
- Lifetime Learning Credit: If your dependent doesn't qualify for the American Opportunity Credit because he or she already completed four years of post-secondary school, you may be able to claim this credit. The amount of the credit is 20% of the first $10,000 of combined post-secondary tuition and fees you paid for your dependent child. The per year (not per child) total should be no more than $2,000.
Though you cannot claim both tax credits for one student, you can claim one of the credits for one student and the other credit for another student.
What Are the Student Loan Interest & Tuition and Fees Deductions?
They are education tax deductions that can help you offset the fees for your child's education. The IRS currently has two student tax deductions available for Tax Year 2016:
- Student Loan Interest Deduction: You may be able to deduct interest paid on a qualified student loan, even if you choose to claim a student tax credit. If you decide to claim the deduction, you could reduce your taxable income by up to $2,500 of the student loan interest you have paid for your dependent child. You don't need to itemize your deductions to claim this deduction.
- Tuition and Fees Deduction: You may be able to claim a tax deduction of up to $4,000 for qualifying tuition and fees you paid for you, your spouse, or a dependent. You may deduct any qualified expenses up to $4,000, even if you paid the tuition and fees with a loan. If you take the Tuition and Fees Deduction and you have also paid interest on student loans, you may be able to take the Student Loan Interest Deduction as well.
What Is the Health Insurance Deduction for Self-Employed Individuals?
If you were self-employed (for example, a sole proprietor or an independent contractor) and you paid for health insurance, you may be able to deduct any premiums you paid for coverage for any child of yours who was under age 27 at the end of the year, even if the child was not your dependent.
In order to qualify for the deduction, one of the following statements must apply to you:
- You were self-employed and had a net profit for the Tax Year reported on Schedule C (Profit or Loss From Business)Schedule C-EZ (Net Profit From Business) or Schedule F (Profit or Loss From Farming). All schedules are for the Form 1040 (Standard Individual Income Tax Return).
- You were a partner with net earnings from self-employment for the Tax Year reported on Schedule K-1 (Partner's Share of Income, Deductions, Credits, etc.), in box 14, code A. This schedule is for Form 1065 (U.S. Return of Partnership Income).
- You used one of the optional methods to figure your net earnings from self-employment on Schedule SE (Self-Employment Tax).
- You received wages from an S corporation in which you were a more-than-2% shareholder (Health insurance premiums paid or reimbursed by the S corporation are shown as wages on Form W-2, Wage and Tax Statement).
The insurance plan must be established under your business. Alternatively, it could be considered for establishment, as discussed in the following statements:
- If you are a self-employed individual filing a Schedule C, C-EZ, or F, a policy can be either in the name of the business or in your name.
- For partners, a policy can be either in the partnership's name or the partner's name. You can either pay the premiums yourself or your partnership can pay them and report the amounts on Schedule K-1 (for Form 1065) as guaranteed payments to be included in your total gross income. However, if the policy is in your name and you paid the premiums yourself, the partnership must reimburse you and report the premium amounts on Schedule K-1 (Form 1065) as guaranteed payments to be included in your total gross income. Otherwise, the insurance plan will not be considered to be established under your business.
- For more-than-2% shareholders, a policy can be either in the S corporation's name or in the shareholder's name. You can either pay the premiums yourself or your S corporation can pay them and report the amounts on a Form W-2 as wages to be included in your total income. However, if the policy is in your name and you paid the premiums yourself, the S corporation must reimburse you and report the amounts on a Form W-2 as wages to be included in your total income. Otherwise, the insurance plan will not be considered to be established under your business.
Medicare premiums you voluntarily paid to obtain insurance in your name that is similar to qualifying private health insurance can be used to figure the self-employed health insurance deduction. If you previously filed returns without using Medicare premiums to figure the deduction, you can file tax amendments to refigure the deduction. However, amounts paid for health insurance coverage from retirement plan distributions that were nontaxable because you are a retired public safety officer cannot be used to figure the deduction.
You can claim the deduction on Form 1040, on line 29.
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