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Parenting is extremely rewarding, but it can also be very expensive. According to the Department of Agriculture, a middle-income family with a child born in 2013 can expect to spend approximately $245,430 to raise him or her to the age of 18. The amount covers food, shelter, childcare, and general education, but it does not cover college.
Thankfully, there are several tax breaks available that can soften the financial impact of having children. The following are three examples.
1. Dependency exemption
Declaring a child as a dependent entitles a parent to a tax exemption of $3,950. This means that $3,950 of the parent's income will not be taxed. This exemption is given to help parents cover the child's basic needs until he or she turns 19. The amount of money saved depends on the tax bracket to which the child's parents belong. However, only one parent can claim a child as a dependent.
2. Child tax credit
Parents can reduce their federal income taxes by up to $1,000 for each qualifying minor child every year until the child turns 17. However, the credit begins to phase out once the parents' gross income is above a certain amount. Married couples filing jointly can claim the full credit if their income is under $110,000. For married couples filing separately, the phaseout starts at $55,000. All other tax payers, including single parents, can take the full credit if their income is $75,000 or below. The credit will be reduced by $50 for every $1,000 that exceeds income limits.
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3. Adoption credit
For adoptions finalized in 2014, the amount of the tax credit is up to $13,190 for each adopted child. Adoptive parents can claim a credit based on their qualified adoption expenses. Qualified expenses include adoption fees and court costs.
If the expenses do not reach $13,190, they can only claim the amount that was actually spent. For expenses that go beyond $13,190, the maximum credit is $13,190 for each adopted child. Adoptive parents of a child with special needs, however, can claim the full amount without documenting expenses.
To learn more about tax credits and exemptions for having children and the qualification requirements, parents should speak with a knowledgeable tax adviser or consultant.
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