Children and Taxes: What You Need to Know

Children are a blessing. Even when they test you (looking at you, threenagers and teenagers), you wouldn’t trade them for anything.

You know what else kids are? Expensive. From buying thousands of diapers to saving for college, it all adds up. And fast.

Even Uncle Sam knows how expensive raising kids can be. That’s why parents are eligible for a slew of tax breaks. But you have to pay close attention—the 2017 tax reform bill made some changes to how your dependents impact your taxes. Let’s take a look.

1. Child Tax Credit

In the new tax-reform world of 2023 and 2024, the child tax credit is now $2,000 per child under the age of 17—with an income limit of $400,000 for married couples ($200,000 for individuals).1

Here’s how the tax credit works. Let’s say you have a family of four: Mom and Dad and their two kids, Kenny and Jenny. Together, Mom and Dad bring home $100,000 and they plan to take the standard deduction.

They would get the standard deduction of $27,700, which would make their adjusted gross income $72,300 ($100,000 – $27,700 = $72,300). Based on fancy tax bracket stuff, their tax for that income level is about $8,236.2 So, applying the $4,000 child tax credit ($2,000 apiece for Kenny and Jenny) would bring down how much tax they have to pay to around $4,236. 

Pretty sweet, right?

In the new, tax-reform world, the Child Tax Credit is now $2,000 per child under the age of 17—with an income limit of $400,000 for married couples ($200,000 for individuals).

2. Adoption Credit and Exclusions

If you adopted a child this year, congratulations on your new addition! Not only did your family grow, there’s also a good chance you’re eligible for the adoption credit. This credit covers up to $15,950 of your expenses per adopted child.3 According to the IRS, qualified adoption expenses include:

Adoption fees
Court costs and attorney fees
Traveling expenses
Any other costs directly related to your adoption

If the credit is larger than your tax bill, you may not get the whole amount back this year. But you can use the remainder on your future tax bills for up to five years.

Also, if your employer provides adoption assistance, you can exclude that amount from your income up to the $15,950 amount. Here’s the thing though—you can’t claim the credit and the exclusion for the same expenses. You can, however, combine both the exclusion and the credit to get the entire $15,950.4

The Adoption Credit covers up to $14,890 of your expenses per adopted child.

Here’s how this works. You spend $10,000 on adoption expenses to bring home your beautiful new bundle of joy. Your employer has a really great adoption assistance program and kicks in $4,000. You exclude the $4,000 from your income. Now, you subtract $4,000 from the overall $10,000 that you would have used on the tax credit, leaving you a maximum $6,000 adoption credit ($10,000 – $4,000 = $6,000). And don’t forget to add the child tax credit and any childcare expenses now that you’re a parent!

Remember, there is an income limit for the adoption credit or the exclusion. If you make less than $239,230, you’re eligible for the full amount. You qualify for a reduced amount between $239,230 and $279,230, and it’s eliminated completely at $279,230 and up.5 

3. Child and Dependent Care Credit

Did you pay someone to care for your child so you could work or look for a job? You could qualify for the child and dependent care credit! This credit can help you claim 20–35% (depending on your taxable income) of some of your childcare costs—up to $3,000 for one child (under the age of 13) or up to $6,000 for two or more.6

Let’s say you have one kid, and last year you spent $2,500 on childcare and your taxable income was $50,000. Based on your income, you’d be eligible to claim 20% of those costs, leaving you with a pretty nice $500 tax credit. That’s more than chump change!

Qualifying childcare expenses include more than just day care. Don’t forget about nanny services, after-school care and summer day camps! Just make sure you have the name, address and taxpayer identification number for each care provider you’ve used.

The Child Care Credit can help you claim 20–35% (depending on your taxable income) of some of your childcare costs—up to $3,000 for one child or up to $6,000 for two or more.

Qualifying childcare expenses include more than just day care. Don’t forget about nanny services, after-school care and summer day camps! Just make sure you have the name, address and taxpayer identification number for each care provider you’ve used.

4. Single Parent Filing As Head of Household

If you’re a single parent, in most cases you can file as head of household. Not only could that lower your tax rate, it also allows you to take a higher standard deduction. For example, if you file as head of household in 2023, your standard deduction will be $20,800, compared to just $13,850 for a single person.7 That’s a whopping $6,950 difference! 

If you’re a single parent, in most cases you can file as head of household. If you file as head of household, your standard deduction will be $18,350, compared to just $12,200 for a single person.

5. American Opportunity Tax Credit

Got kids in college? Help them stay out of student debt and catch a break on your taxes with the American opportunity tax credit (AOTC). The credit applies to any qualified education expenses, like:

Tuition
School fees
Required textbooks

The credit covers 100% of education expenses up to $2,000 and 25% of the next $2,000 after that. For all you math majors out there, that means you could get a maximum credit of $2,500. There is an income limit of $80,000 for those filing single or $160,000 for married couples, and above that it starts to phase out. Once you make more than $90,000 filing single or $180,000 as joint filers, you can’t claim the credit.8

6. Tax Advantaged College Savings

While we’re talking college, did you know there are certain types of college savings programs that are tax exempt? That’s right, you can save for your kids’ college tax-free with an Education Savings Account (ESA) or a 529 plan!

Before you start saving up that college fund, though, we recommend you do the following:

Make sure you’re out of debt (a 15-year fixed-rate mortgage is okay).
Have an emergency fund of three to six months’ worth of expenses.
Contribute 15% of your income toward retirement savings.

If you’re ready to take the first step toward saving for your kids’ education, get in touch with a SmartVestor Pro to get started.

Don’t Miss Out on Tax Savings

If you’re confident you can handle your own taxes and just want easy-to-use tax software, check out Ramsey SmartTax—we make filing your taxes easy and affordable.

But if you’d rather not squeeze doing your own taxes into an already jam-packed schedule, try a RamseyTrusted tax pro. We only accept certified public accountants (CPAs) and enrolled agents (EAs) who are experts on taxes. Working with a pro gives you confidence that you’ve done your taxes correctly and taken advantage of all of the savings you’ve earned.

Find your tax pro today!