The arrival of a child necessarily means an increase in a family’s expenses. However, children may entitle you to claim several tax deductions and tax credits. Depending on which tax breaks you qualify for, you can reduce your tax liability and therefore increase your tax refund. Some tax credits are refundable, meaning they can decrease your tax liability to less than zero. Nonrefundable tax credits can reduce your tax liability to zero, but no further.
Anyone with a dependent child can claim a dependent exemption. The exemption was $3,800 as of 2012 and is adjusted annually. Claiming the exemption reduces your taxable income by that amount. Since you are taxed on less income, your refund will be larger. Alternatively, you may claim an additional withholding exemption on your W-4 form so that your take-home pay is increased. Depending on your circumstances, a qualifying child may include your child, stepchild, adopted child or foster child.
If a child is under age 17 and you meet certain income guidelines, you may be able to claim the Child Tax Credit. As a credit, this amount -- which can be as much as $1,000 per child -- is subtracted from your tax liability. The Child Tax Credit is a nonrefundable credit, so you cannot claim an amount that is more than your tax liability. For example, if you owed only $2750 in taxes for the year and had three qualifying children, your credit would take your tax bill down to $0, but you would not receive the additional $250 as a refund.
You may have to pay child care expenses so that you can go to work or look for work. If the child is a qualifying child and is less than 13 years old, you can get a Child and Dependent Care Tax Credit equal to 35 percent of the first $3,000 in child care expenses. If you have two or more qualifying children, the maximum is 35 percent of the first $6,000 in child care expenses. Like the Child Tax Credit, the Child and Dependent Care Credit is a nonrefundable tax credit, so your tax liability will not be brought to less than $0.
Like other credits, the Earned Income Tax Credit reduces your tax liability, and therefore if you are owed a refund, your refund will be bigger if you qualify for the credit. Unlike some other credits, however, the EITC is a refundable credit, so you might even get back more than you have paid in in taxes. The amount of the credit varies depending on your adjusted gross income. For example, for taxpayers filing a joint return with one child, the maximum credit was $3,169 as of 2012. As your income increases, the EITC amount is gradually phased out until it reaches zero. This eligibility income limit varies depending on the number of children you have and on your filing status.
- Internal Revenue Service: In 2012, Many Tax Benefits Increase Due to Inflation Adjustments
- Internal Revenue Service: A “Qualifying Child”
- Internal Revenue Service: Ten Facts about the Child Tax Credit
- Internal Revenue Service: Topic 602 – Child and Dependent Care Credit
- Internal Revenue Service: Preview of 2012 EITC Income Limits, Maximum Credit Amounts and Tax Law Updates
- Bankrate.com: Tax Credits: Cut Your Tax Bill