Products You May Like
The cost to raise a child has become expensive for parents in the U.S. As tax season approaches, it’s smart to pay attention to tax breaks related to children and care expenses.
Costs for child care have increased significantly due to inflation. Many child care centers also bumped their rates amid the so-called child care cliff of pandemic aid expiring.
To that point, 47% of parents spent more than $1,500 a month on child care expenses in 2023, Care.com found. Meanwhile, 20% of parents shelled out at least $3,000 per month. The site polled 2,000 U.S. parents with children age 14 or younger.
More from Personal Finance:
Money tips for single moms
Why can’t young adults leave the nest? Blame high housing costs
Laid off? Take these money and job-hunting steps
“I have some clients that have three young kids in daycare and their daycare costs are like $5,000 a month,” said Sophia Bera Daigle, a certified financial planner and the founder of Gen Y Planning in Austin, Texas. She’s also a CNBC FA Council member.
Fortunately, there are two tax credits with different parameters that are meant to serve parents and help offset some of these costs.
How the child tax credit works
The child tax credit is meant to help families navigating the expense of raising a child.
“The intent behind the child tax credit is to give parents a bit of a break,” said Ted Rossman, a senior industry analyst at Bankrate.
The child tax credit was temporarily expanded during the pandemic, but expired at the end of 2021. Now, Lawmakers are considering an $87 billion bipartisan tax agreement that could once again boost the child tax credit starting in 2023.
The changes proposed earlier this week would retroactively boost the maximum refundable tax break to $1,800 per qualifying child for 2023, up from the current limit of $1,600. The limit would increase to $1,900 for tax year 2024, and $2,000 for tax year 2025, along with inflation adjustments.
“The child tax credit is very broadly applied,” Rossman said.
It’s “something that all parents can claim within the income thresholds,” he added. For 2023, the credit starts to phase out for those with an annual income of $200,000 or more, or $400,000 for married couples filing jointly.
How the child and dependent care tax credit works
The child and dependent care tax credit is meant to help working families offset the costs of care for kids under age 13 and adult dependents. It’s not just for daycare: Expenses such as summer day camp can qualify, too.
“It’s not as generous as the child tax credit, but it still can be meaningful,” Rossman said.
The credit is capped at eligible expenses of $3,000 for one qualifying child, or $6,000 for two or more. Depending on your income, the credit may be worth up to 35% of those expenses.
However, there are a few limits, Daigle said.
“It’s specifically for working single parents or dual income, working spouses. If you have a stay-at-home parent … you cannot claim this credit,” she explained.
Families who use a dependent-care flexible spending account to set aside pre-tax dollars for child care will also need to pay attention to those contributions. Expenses you paid for with FSA funds can’t be counted toward the tax credit.