Raising kids is expensive. Thanks to some breaks in the tax code, however, raising kids can at least lower your income taxes -- if you know how to take advantage of them.
Here are ten tax credits you should know about as you raise kids from birth to adulthood:
1. Year of birth.
A day is as good as a year, at least in the year your child is born. If the little princess appears by midnight, December 31, you take the dependency exemption for the whole year. In 2010, each child reduces your taxable income by $3,650.
2. Dependency exemption for children of separated or divorced parents.
The parent who has the children living with him or her usually gets the exemption, but not always. In some cases, the custodial parent can sign a written declaration allowing the other parent to take the exemption.
3. Adoption expenses.
Here's one not to miss: The Adoption Credit gives you back -- dollar for dollar -- the first $13,170 you spend adding a child to your family through adoption.
4. Medical expenses.
You can deduct medical expenses to the extent they exceed 7.5% of your adjusted gross income. For example, if you make $40,000, you can deduct total medical expenses over $3,000. By the time you count birth preparation classes, out-of-pocket hospital and doctor visits, prescriptions, insurance premiums and now even breastfeeding and lactation supplies, you may reach that floor faster than you think. Deduct expenses in the year you pay them, regardless of when you received the services.
5. Child tax credit.
Here's a cool $1,000 on top of your dependency exemption. And thanks to the "additional child tax credit," you may be able to take the credit and get a tax refund even if you don't pay enough income tax to take the entire child tax credit against the tax you paid.
6. Child care credit.
Depending on your income level, you could get a credit of up to 35% of the money you paid to take care of the kids while you worked or looked for work. You must ask your child care provider for their tax identification number. If they won't give it to you, you can sign on the form that you made a good faith effort and take the credit anyway.
Don't assume you can't take the child care tax credit because your ex is taking the dependency exemption, either. The two tax provisions are completely separate. If the kids live with you, and you pay for child care, you probably qualify for the credit.
7. College savings.
You have several tax-advantaged options to help you save for your kiddo's college, from Education Savings Bonds to prepaid tuition.
8. College tuition and expenses.
Check out the American Opportunity Credit, the Lifetime Learning Credit and the deduction for tuition and fees if your kids have post-secondary school expenses.
9. Student loan interest.
You can deduct up to $2,500 in student loan interest, even if the loan is for your dependent child.
10. Filing status.
Don't be too quick to check the Single box just because you're not married. If you have a kid in your home, you may qualify to file as Head of Household or Qualified Widow(er), which gives you preferential tax treatment.
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