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Tax Benefits of Having a Child

Posted by McDonald & Osborne Posted on Oct 09 2015

New parents are often shocked at the added expenses that come along with raising a new child. The projected cost of raising a child to the age of 18 can be upwards of $150,000 (depending on where you live, income and whether you pay their college tuition). Luckily, there may be some tax savings to offset some of these expenses in the form of a Child Tax Credit.

Taxpayers with one or more qualifying children may be able to claim a child tax credit of up to $1,000 per child every year, until they reach the age of 17. Unlike a deduction that reduces the amount of income the government gets to tax, a credit reduces your tax liability dollar for dollar. (Don’t get confused. Read on until the end…we’ve included an example.) However, the credit is phased out for married filing joint taxpayers with incomes beginning at $110,000, and singles whose income rises above $75,000.

The child tax credit is generally considered a nonrefundable credit, limited to the amount of your regular tax liability plus alternative minimum tax liability, if any. However, a portion of the credit (the Additional Child Tax Credit) may be refundable for certain taxpayers.

Your Additional Child Tax Credit is the smaller of:

  1. The amount of the child tax credit remaining after reducing regular tax and AMT tax to zero, or
  2. 15% of the taxpayer’s earned income in excess of $3,000 (for 2010).

For example, say you are married (and file jointly) and earn $45,000 for the year in wages. You have 2 children and your tax liability at the end of the year is $475. Your credit would be calculated as follows:

Maximum available credit: $2,000 ($1,000 x 2 children)

Child tax credit: $475 (Because your tax liability is $475, the credit only goes as far as reducing your tax liability to zero.)

Additional Child Tax Credit is the smaller of:

  1. The remaining child tax credit: $2,000 (the max available credit) – $475 (the child tax credit taken) = $1,525 OR
  2. 15% of the taxpayer’s earned income in excess of $3,000: ($45,000 – 3,000) x 15%] = $6,300.

The taxpayers in this case would receive a refund of $1,525.

These credits are not the only tax savings that come with having a child. Stayed tuned as we will discuss the Child and Dependent Care Credit in an article coming soon!

Stephen Osborne

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