If you became a parent in 2014, you've probably figured out by now that kids can be expensive. There's not much to do about that, but at least there are tax breaks available to you that help make raising children a little more affordable. Here are five that every new parent should know about.
Child Tax Credit
Just for being a parent or guardian, you may be eligible for a tax credit of up to $1,000 for each of your qualifying children. This credit is slowly phased out at higher income levels, beginning at $110,000 for married couples filing jointly. On the other hand, if the amount of credit for which you qualify exceeds the income tax you owe, the excess credit may be converted to the Additional Child Tax Credit, which is a refundable credit.
To qualify, your child must have been under age 17 on December 31, 1014, be claimed as a dependent on your tax return and must have lived with you for at least half of the year. If your child was born in 2014, he or she must have lived with you for at least half the time he or she was alive during 2014.
If your family has recently grown through adoption, you may qualify for an adoption credit. It may cover your court costs, adoption fees and travel expenses. Families who adopt a child from foster care with qualified special needs can claim the credit, even if they do not have any expenses to document.
This nonrefundable credit, which can be claimed once per adopted child, is based on the year in which your adoption was finalized. In 2014, the maximum credit is $13,190.
Child and Dependent Care Credit
Working parents often have to pay someone to watch their children, and they may be able to receive a tax credit to help offset those costs. To qualify for the Child and Dependent Care Credit, you must have earned income for the tax year, and if you are married, your spouse must have earned income, too. The care must have been provided so you (and, if you are married, your spouse) could work or look for work.
If you have one child receiving childcare, you can use up to $3,000 worth of expenses to figure your credit. Families with more than one qualifying child can calculate their credit based on up to $6,000 in expenses.
Coverdell Education Savings Account
It's never too early to start saving for your little one's education, and Coverdell ESA is designed to help parents do just that. The money you contribute to a Coverdell ESA can be used to pay for K-12 and higher education expenses.
Contributions to a Coverdell ESA are not tax-deductible, but distributions are tax-free, as long as they are used for qualifying educational expenses. You may contribute up to $2,000 per student each year. Income limits do apply.
529 plans are a way to save for your child's post-secondary education expenses. They are not run by the federal government, but are authorized under the Internal Revenue Code. These are often state- or school-sponsored plans.
There is no income limit for contributing to a 529 plan, and although contributions are taxed, deductions for qualifying expenses are not. Qualifying expenses can include tuition, books, fees and supplies. Some students will also be able to use 529 savings for room and board.
For more tax tips listen in to Jeffrey Hayzlett's interview with investment advisor Ric Edelman.
Meghan Ross is a freelance writer covering all things home and living. Her work can be found on Examiner.com.
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