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Children & Taxes: The Details

When it comes to having children and taxes there are several scenarios that you should be aware of as you begin to complete your taxes. Hopefully, you are not experiencing any issues with filing your taxes this year but for those of you who file taxes more than once per year or for anyone who wants to get a jump on preparing their 2024 federal tax return, we hope that this blog post will be helpful. Bear in mind that the information contained in this blog post is not tax advice. The attorneys at the Law Office of Bryan Fagan want you to be able to have information at your disposal but if you have tax questions, please contact an experienced tax professional. Questions about family law, divorce, and planning for life after a family law case should be directed at the Law Office of Bryan Fagan.

Whether or not children are expensive is up to the eye of the beholder. We’ve all heard someone during our lives tell us that having kids is expensive. The person usually won’t elaborate too much on that subject, content to just leave it at that. However, you need to think about the expenses of having a child from your perspective and situation. This has more to do with family planning than it does explicitly with taxes, but the two subjects are related. There are ways for you to plan for the finances of your family and implement tax-saving solutions believe it or not. 

The Child Tax Credit

The most common tax-related money-saving method that you can take advantage of is to determine whether your child is eligible for a child tax credit when applied to your federal income taxes. Tax credits are not the same as tax deductions. A deduction lowers the amount of taxes that you must pay by reducing your taxable income. A tax credit, on the other hand, does not reduce your income but it does reduce the amount that you must pay in taxes. A tax credit like the child tax credit allows you to potentially receive a refund on your taxes even if your overall tax burden for a year is zero. In 2023 the child tax credit refund amount is up to $1,600. Many other credits available on your taxes can reduce your tax burden but do not allow you to receive a refund, as well. 

The child tax credit amount has increased over time. From 2018 through 2020 the tax credit for having a qualifying or eligible child was $2,000. However, in recent years that amount has increased up to $3,000 for a child under the age of 17. That amount jumps up to $3,600 for a child who is under the age of six! It seems like this part of the credit can vary on a person-to-person basis but many parents receive the refund in smaller payments throughout the year. However, you should get with an experienced tax professional to discuss how that would apply to your specific situation. 

Bear in mind that this was the situation in 2021 when economic payments were made in conjunction with COVID-era relief plans from the federal government. In 2022 the child tax credit was lowered back to $2,000 for each qualifying child and no monthly payments were made in that year. What you want to avoid, if possible, is a situation where you owe taxes when you otherwise would not have to. You can go back and change your withholdings to reflect the lower child tax credit amount so that you are not withholding too little money. The result of this would be that you end up having to pay taxes rather than receive a refund or pay nothing. 

You can review your withholdings periodically especially if you have a child who is nearing age 17. In that case, you can begin to account for the child no longer being eligible for the child tax credit. In that case, you should consider paying more in taxes throughout the year so that there are no issues related to owing taxes unexpectedly when it comes time to prepare your taxes for a given year. If you have a tax professional to help you that is a good question to ask him or her in the middle of the year. If you do your taxes, you can ask your human resources department to send you any tax documents that you have filled out to determine what your withholding status may be. At that point, you can account for any changes that are going to be necessary based on the age and status of your children. 

Make sure your child is eligible for the tax credit 

Before you start to make withholding assumptions as far as your child is eligible for the child tax credit you need to figure out whether or not your child is eligible to help you receive the child tax credit in the first place. If you are married and filing jointly for that particular year, then you are eligible to receive the credit if your adjusted gross income is $400,000 or less. This means that for most families your child will be eligible, but it bears mentioning that this is not the case across the board for families. 

How this issue impacts families going through family law cases is that not every parent will find themselves in a position where they will be able to receive the credit. This is not the case due to your earning an income that is too high or too low, but rather because a parent needs to have provided at least half of your child’s financial support to get the tax credit. Additionally, your child needs to have lived with you for at least half of the year to be eligible, as well. 

For non-primary conservators, the parent with whom the child does not reside for at least half of the year can be a problem. You should look at your court order and determine your custody breakdown as far as how much time your child spends with you. If you are a parent who pays child support, then it is incredibly unlikely that you will be able to qualify for this credit for no other reason than your child probably does not stay with you enough each year to cross the 50% threshold. If your child has been staying with you this much but the court orders in your case indicate that you have much less visitation or possession, then you may want to consider having your child support modified to compensate you for all the time your child spends in your home. 

What impact does caregiving or daycare have on your taxes?

When it comes to the costs associated with caring for a child, childcare is probably the most expensive aspect of having a child unless he or she has a chronic medical condition. For children that are not in and out of the doctor regularly, it is childcare that tends to be the most expensive aspect of parenting. While you may have children who are in public school, putting your child into a daycare or other similar childcare environment is where you can see costs for your child start to reach a high number. 

Fortunately, if you do have to pay for childcare then you should know that there are credits available for you if your child is in daycare. The child and dependent care credit apply to children who are under the age of 13 or a dependent who is disabled of any age. Up to 35% of qualifying expenses of $3,000 for one child or dependent may be credited on your taxes on a per-child basis up to $6,000 total being claimed as a credit for multiple children. 

This credit is intended to help you and your family offset some of the childcare expenses that you experience every year. This could be for Montessori Schools, daycare, at-home care, and another way that you pay for childcare out of your pocket. You should think hard about where you send your child for care and whether you will be able to claim credit for this type of care, as well. 

The earned income tax credit

In the aftermath of the pandemic, some of your reading this blog post may find yourselves in a position where you are earning less money than you did earlier in your life. As a result, if you are struggling to make ends meet due to a lower-than-usual income then you need to know about the earned income tax credit. For those who have lower-than-average incomes, the earned income tax credit can be your ticket to a smaller tax bill and more money in your pocket for the rest of the year. 

Typically, if you earn around $45,000 or less annually then you would qualify for this credit so long as you have a child that you are the primary caretaker for. This is a big-time credit that was worth $6,935 in 2022 on your taxes if you have three or more children. This is also a refundable tax credit which means that you still receive the difference as a refund if the credit is more than what you owe on your taxes. 

The less money that you earn, the more money that you will be able to get back on your taxes in the form of credit and the possibility of a refund overall. From the mid $3000s to the high $6000s, this credit is not one that you should overlook if you are a person who does your taxes during the year. Factors that are relevant to figure out when determining how much credit you are eligible for are how many qualifying kids you have, your income as well as your filing status. If none of your kids qualify then you can still receive a tax credit of $560.

A tax credit for adopting kids

If you adopted a child in 2022 then you can claim a federal adoption tax credit of nearly $15,000 per child that you adopted. If your modified gross income is below $223,410 then that is the sum of money that you can expect to receive in a tax credit per child that you adopted. If your modified gross income is between $223,410 and $263,410 then you would receive a partial tax credit based on how many children you adopted. Earnings above $263,410 and you would no longer be eligible for the tax credit. 

The tax credit increases for children adopted in 2023. This year you can claim a federal adoption tax credit that maxes out at $15,590 per child. The maximum adjusted gross annual income for 2023 which would qualify you for this tax credit is $239,230. If you earn any more than $279,230 you would no longer be eligible, but you could receive a partial tax credit for earning between these two figures. F

Adopting a child is expensive, I would say without reservation. Even for those who have very high incomes the process of adopting a child is anything but cheap or inexpensive. You should be prepared to pay various sums of money throughout the adoption process. Some fees apply to working with a child placement or adoption agency as well as attorney fees if you realize that working with a lawyer will be of some benefit to you and your family. While every parent that ultimately adopts a child would agree that these expenses are worth the cost it is also true that the money is real, and the expenses are not reduced just because you have good intentions for adopting a child. 

Also, if you plan on adopting a stepchild then this would not count as an adoption to take advantage of this tax credit. It is possible that your spouse can take advantage of the other tax credits that we have already discussed in this blog post. However, if you decide to adopt your stepchild then the adoption tax credit is not one that you would be eligible for. Even if you are unsuccessful in attempting to adopt a child you can still take advantage of the tax credit if the adoption was domestic. 

American Opportunity Tax Credit

If you are reading this blog post and have an older child that you are still financially supporting, then you may be wondering if any of these tax credits are going to apply to you. The tax credits are generally off-limits to the parents of older children but there may still be some benefits available to you through the tax credit programs for parents in the United States. 

For instance, if you have a college-aged child then you could review the eligibility requirements for the American Opportunity Tax Credit. This credit covers 100% of tuition and fees up to $2,000 for high education expenses. The cap on this credit is $2,500 per year. To be able to claim this credit your adjusted gross income has to fall between $80,000 and $90,000 if you filing as an individual or between $160,000 and $180,000 if you are filing jointly with your spouse. There is a $1,000 refundable portion of the tax credit, as well. 

Lifelong Learning Tax Credit

Finally, if you are the parent of a college-aged student then you should review your eligibility for the lifetime learning tax credit. This credit offers parents a 20% credit on approximately $10,000 in maximum expenses for a child every year. Again, your modified gross income must be between $80,000 to $90,000 annually as a single filer or $160,000 to $180,000 as married filing jointly. This tax credit is available even to you and your spouse if one or both of you are taking college classes. 

Final thoughts on tax credits and children 

Taking care of children is a challenge, but those challenges do not need to extend into the realm of paying taxes. While we can debate how much is “too much” to be taxed, you should at least be aware of the tax credits that are available for you and your family through the years for your children. Children both young and old may be eligible for a number of these credits. The best way for you to learn about them more in detail is to reach out to an experienced tax professional. However, if you are also going through a family law case and need help, please contact the Law Office of Bryan Fagan today. We are ready to help.

Questions about the material contained in today’s blog post? Contact the Law Office of Bryan Fagan

If you have any questions about the material contained in today’s blog post, please do not hesitate to contact the Law Office of Bryan Fagan. Our licensed family law attorneys offer free-of-charge consultations six days a week in person, over the phone, and via video. These consultations are a great way for you to learn more about the world of Texas family law as well as about how your family’s circumstances may be impacted by the filing of a divorce or child custody lawsuit. 

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