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The excitement is real when it comes to those precious little bundles of joy and taxes!
Dependents can give you some fantastic tax credits and deductions. Which ones and how much is where the confusion comes into play. Let’s see if we can clarify some of the “rules”, maximize your refund, and help you pay less to the IRS!
Often there is a misunderstanding between a tax credit and a deduction. Tax credits are typically better because they can reduce your tax liability dollar-for-dollar, and some are even refundable (you get the dollars added to your refund even if you don’t have a tax liability). A tax deduction simply reduces your taxable income so you pay less overall tax (you save the percentage of tax for that deduction amount).
Remember, this is merely an overview and TurboTax has a simple step-by-step interface that asks you all the right questions. We want you to get every possible deduction and credit you’re eligible to receive. You’ve got this, and we’ve got you!
Here we go!
Child Tax Credit (CTC)
The Child Tax Credit is the first credit you think of when you have a child! For 2023, the credit is capped at $2,000, with $1,600 of it potentially being refundable. Unfortunately, the generous child tax credits received in 2021 have not been extended into 2022 and 2023.
If you are filing jointly, you will qualify for the full credit as long as your AGI (Adjusted Gross Income) is less than $400,000. (Single and Head of Household filers must have AGI of less than $200,000 to receive the full credit.) If your income is above those limits, the credit will be gradually reduced down to $0.
To claim children for the Child Tax Credit, they must meet the following criteria:
- Be your biological or adopted child, step-child, eligible foster child, younger sibling (including step- or half- siblings), or their descendant.
- Be under age 17 on December 31st of the tax year for which you are claiming the credit (or permanently disabled).
- Not have provided more than half of their own financial support during the tax year.
- Must have lived with you for more than half of the tax year (with exceptions).
- Must be claimed as a dependent on your tax return.
- Can’t file joint tax return for the year (exception if only filing to claim a refund of taxes paid or withheld).
- Be a U.S. citizen, U.S. national, or U.S. resident alien.
- Have a Social Security Number issued by the Social Security Administration.
Other Dependent Tax Credit
Maybe you don’t have children, they're older than 17, or you support a friend or relative. No problem! You could still get a tax credit for your other dependents. This one is up to a $500 dollar-for-dollar reduction of your tax bill or in the form of an increased refund.
This credit has the same income levels as the Child Tax Credit above.
Child and Dependent Care Credit
Okay, you have to work but how are you going to pay for the high cost of childcare?
First, check with your employer. Many employers offer a special Dependent Care FSA (Flexible Spending Account) in which the employer can withhold pre-tax dollars (or contribute on your behalf) specifically targeted toward dependent care expenses. Do you have more expenses than money in your Dependent Care FSA? The good news is that you can have both the Dependent Care FSA and take advantage of the Child and Dependent Care Credit. However, you can’t double-dip and use the same expenses for each.
Now, let’s take a peek at that Child and Dependent Care Credit. Remember why we love tax credits - they are a dollar-for-dollar reduction to your tax liability.
If you incur child care expenses while you work (or are looking for work) and you have a dependent child under the age of 13 (no age limit if disabled) you can qualify for this tax credit. Eligible expenses could be payments for private care, childcare facilities, nursery school and even day camps or after-school programs!
For the 2023 tax year:
- The expense limit is $3,000 for one qualifying person and $6,000 for more than one qualifying person
- The percentage used to calculate the credit amount ranges from 20% to 35% and is based on your income
Figuring out how much your credit will be can get a little tricky. But, you guessed it, TurboTax has got you covered!
Earned Income Tax Credit (EITC)
This is a good one! It’s a fully refundable credit which means you could get more of a refund than the taxes you had withheld from your income.
If your income is on the lower end, and you have children, you’ve probably already heard of the Earned Income Tax Credit (EITC). How much of this credit you’re entitled to, if any, depends on your age, income, filing status, and how many children you have (if any).
For 2023, the credit ranges from $600 to $7,430 (sliding scale) based on income and filing status. This potentially means a lot of dollars in your bank account!
Here are a few caveats:
- You must have “earned” income from a job or self-employment
- You cannot have investment income of more than $11,000
- You must be a U.S. Citizen or Resident Alien the entire tax year
- You must have paid more than half the cost to keep up a home during the tax year
Check out this article 5 Facts About the Earned Income Tax Credit to learn more.
Education Benefits
Are you sending your child off to college? It's a bittersweet time in life and the cost for that degree can be…shocking! The IRS values education and is trying to help you out a bit on this one.
There are two main Education Tax benefits - the American Opportunity Tax Credit and the Lifetime Learning Credit. Both of these can reduce your tax liability dollar-for-dollar. The best part is that the American Opportunity Credit has a refundable portion (up to 40% of the credit). That means if your credit is more than your tax liability, the difference goes into your pocket!
The American Opportunity tax credit
This credit is worth up to $2,500. How it works is that the first $2,000 of qualifying expenses is allowed, then 25% of the next $2,000 totaling $2,500 per student. To qualify for the American Opportunity tax credit the student must be in the first four years of college and your income must not exceed $160,000 if you’re Married Filing Joint ($80,000 Single) to get the maximum benefit. Income above those amounts will cause the credit to phase out.
The Lifetime Learning credit
If you don’t qualify for the American Opportunity Credit, no problem! The Lifetime Learning Credit might be just the thing for you! The maximum credit you can receive is $2,000. It’s calculated using 20% of eligible expenses up to the maximum of $10,000. The not so great part of that is the limit of $2,000 is per tax return, not per student. The good part about the Lifetime Learning credit is that you don’t have to be in a four-year program to benefit, or even working on a degree. Most higher-level educational courses qualify. The income limit phaseouts are the same as the American Opportunity Credit, as are the qualified expenses.
A couple more things to remember: 1) you can’t double-dip or claim both the American Opportunity Credit and the Lifetime Learning credit in the same year, for the same person 2) if you are claiming the credit for yourself, you can’t be claimed as a dependent on someone else’s return, such as a parent.
Bonus Tip: While your children are young, it’s a great idea to contribute into a 529 College Savings Plan or Coverdell Education Savings Account. When they go off to college, you can take tax-free distributions to cover qualified education expenses. Also, some states even allow a deduction for the contributions you make.
Adoption Credit
Congratulations and thank you for adopting! The IRS wants to help you celebrate the joy of your new family member by reducing your tax liability!
The Adoption Tax Credit is a pretty large dollar amount of up to $15,950 per child in 2023 and with that, it has many “rules”. So, I’ll keep this relatively brief and link to where you can learn more details.
The Adoption Credit is a non-refundable credit. What this means is that it is dollar-for-dollar to reduce tax liability, but you don’t get the excess back as an additional refund if your total tax liability is less than the credit amount. Don’t worry, the IRS is the gift that keeps on giving where this credit is concerned! Any unused credit can carry forward for up to five years.
There’s more good news! The expenses that qualify can be incurred in preparation for adopting, whether or not that adoption finalizes. Don’t get too carried away though, expenses for remodeling or decorating your child’s new bedroom don’t count. However, expenses such as application fees and home studies do qualify!
The rules here can be complex and the credit depends on when the expenses were paid, whether it’s domestic (U.S. or its possessions) or foreign, and when the adoption is finalized (if it finalizes).
Make sure to keep good records describing your adoption expenses, keep the receipts, and of course the dates - TurboTax will do the rest!
We’ve got you covered!
The tax benefits above are for the federal side of things - the IRS. While many states follow federal laws, some state tax benefits for dependents may differ. But, rest assured, TurboTax will easily help you get all you’re eligible for on your state taxes too!
As with all things tax, the “rules” continue to change and it can be overwhelming. But TurboTax will be right there, inspiring confidence and even holding your hand if needed! If you panic and run for the door when the word “tax” is mentioned, we’ll take care of you with that too! Our expert EAs and CPAs can prepare your taxes for you - from start to finish. TurboTax Live Full-Service Experts are ready to help!
Want more details? Check out the articles below.
Who can I claim as my dependent?
Rules for Claiming a Dependent on Your Tax Return
The Dirty Dozen: 12 Tricky Tax Dependent Dilemmas
How do I report and pay the Kiddie Tax on my return?
The Ins and Outs of the Child and Dependent Care Credit