|

Parents’ guide to taxes

Don't miss out on these credits and deductions

Published: February 2013

You probably know that you get a federal tax deduction just for having a child. But that’s just one of the tax breaks your bundle of joy can bring. Below you'll find a rundown of other breaks you won’t want to miss.

Before looking at specific breaks, the first question is, Which form should you use? If you’re a parent claiming a dependent, your days of using the 1040EZ may be over.

If you make more than $100,000 or itemize your deductions, you'll need to file the “long form,” Form 1040. If neither of those criteria apply and you meet other requirements, you may be able to file the less-complex Form 1040A.

In practice, though, unless you plan to download and fill out IRS forms by hand or prepare your taxes using the IRS’ fillable forms, you won't have to think about these choices. Tax software automatically chooses the proper form for you. If you use a preparer, he or she will provide it. Keep in mind, though, that Form 1040 may take you more time and require you to collect more records in advance. Check the Internal Revenue Service’s website for more information.

Credits and withholdings

Exemption for dependents
This will be good for $3,800 off your 2012 taxable income for you, your spouse, and every child in your family who qualifies as a dependent, regardless of your income. A qualifying child must be younger than age 19; a full-time student under age 24; or a permanently disabled child of any age, who is your child, stepchild, foster child, grandchild, adopted child, or a sibling who is younger than you. Find more specifics about qualifying children on the IRS website.

Child tax credit
This is a credit of up to $1,000 for every dependent child under the age of 17 that can be claimed on a short tax form, 1040A. A credit is even better than an exemption because it cuts your tax bill by that amount, rather than reducing the amount of your income that is subject to tax. (A couple in a 25-percent marginal tax bracket, for instance, would save $1,000 in taxes with a credit versus just $250—25 percent of $1,000—with an exemption.) Couples filing jointly must have an adjusted gross income of less than $110,000 to qualify for the full credit.

Adoption credit
This one-time tax credit of up to $13,360 is available to parents who adopt an eligible child (one who is under the age of 18, or physically or mentally incapable of caring for him or herself). The credit is reduced if your modified adjusted gross income is more than $185,210. (Those with an adjusted gross income of $225,210 or more are not eligible.)

Earned-Income Tax Credit (EITC)
This break is for moderate to low income families. For 2012, adjusted gross income must be less than $41,952 ($47,162 for couples married and filing jointly) with two qualifying children. A child who qualifies has to be younger than 19 or a full-time student younger than 24. (See other qualifications.) Learn more about the EITC (PDF).

Tax withholdings
Tax withholdings—the money that's taken out of your paycheck for federal and state taxes—can change as your family grows. If you haven't filled out a new W-4 form since you had kids, now could be a good time to do it. Each additional withholding allowance you claim will mean more money in your paycheck. You may appreciate having the additional cash to stash in a college fund or help pay for preschool. Of course, if you under-withhold, you can get the money back the following year as a tax refund. Some people like the idea of a fat refund check to bolster their checkbook or as a sort of forced savings, but in fact they’re letting the IRS hold onto their money all year when it could be earning interest, however paltry these days, in a savings account, or invested. CR strongly advises against this fat-refund strategy.

Breaks on child care

The U.S. government also affords parents tax relief to care for children. Here's how.

Child and dependent care credit
This helps parents with kids younger than age 13 to cover some of their child-care expenses. (Nursery schools, after-school programs and day camp can be considered qualifying expenses, assuming the institutions have the proper tax identification.) Parents with an adjusted gross income of $43,000 or more can claim a credit equal to 20 percent of amounts up to $3,000 per child, or $6,000 for two or more children. So a couple claiming $3,000 in child-care costs would be entitled to a credit of at least $600. Read IRS Publication 503, Child and Dependent Care Expenses, for more information.

Dependent care flexible-spending account
Parents who use an employer-offered flexible spending account can set aside up to $5,000 in pretax earnings each year to spend on care of dependent children younger than 13—including day care, after-school care, and even summer camp. (This is similar to what qualifies for the child and dependent care credit.) The plan then reimburses your expenses throughout the year. (The same general flexible-spending rules apply for adult dependents requiring adult day care. Check with your benefits department for specifics.)

For parents in the 25 percent tax bracket (for 2012, that’s married joint filers with income between $70,700 and $142,700), the break would be $1,250. To qualify, you’ll need to get a federal tax I.D. number from the child-care provider (as you would for the child and dependent care credit).

At tax time, fill out IRS Form 2441, Child and Dependent Care Credit, and include information on how much was spent from your dependent-care flexible spending account. By filling out this form, you may be deemed eligible for an additional child-care tax credit.

Donating baby's stuff

Turn your clutter into cash

If you itemize your tax return, you can get a charitable deduction when you donate your child’s old clothes and toys to qualified organizations such as a church, veterans' organization, or the like. One heads up: According to the IRS, clothing should be in good used condition or better, and a deduction of more than $500 for donated clothing requires a qualified appraisal. For safety’s sake, make sure that the parts or paint on donated toys are not worn, chipped, loose or broken, and that the item has not been recalled. You’ll have to estimate the value of the donated property yourself. Learn more about how to estimate the value of donated items at Turbo-Tax’s ItsDeductible calculator or H&R Block's DeductionPro calculator.

Professional tax preparer vs. tax-prep software

If you’re a new parent and you’re not sure where to start at tax time, consider hiring a professional tax preparer.

“Everyone who is even remotely unsure of how to prepare their own tax return, or has questions regarding tax law (income, deductions, credits, etc.), should seek professional assistance,” Cindy Hockenberry, an enrolled agent and supervisor at the National Association of Tax Professionals, said. The alternative, a tax-prep software program, may be chancy, she suggests, since parenthood may put you in new territory tax-wise. Taxpayers who are unfamiliar with tax laws are “still responsible for the accuracy of the return,” she said. “Reliance on a software program will not relieve them of tax liability, interest, or penalties if an error is made.”

But Consumer Reports has found that, for most people with relatively simple needs, off-the-shelf tax software available in stores or online tax-prep programs are probably adequate.

If, for instance, you and your spouse get most of your incomes from paychecks, have most of your investments in your 401(k)s, and don’t own more than one home, the software is likely to be just fine. Young families with small businesses or complex investments in, say, real estate, should visit a CPA or enrolled agent.

The tax software products we’ve reviewed, including TurboTax and H&R Block At Home, do a very good job of asking specific questions about changes in you life that might lead to a tax break, and walking you through questions to ensure you get them. They’re also relatively inexpensive. The main reason not to use them is that they take time to use, and people may feel unsure of themselves when using them for the first time. A simple return can take as little as an hour—probably more for returns with itemized deductions.

Another potential advantage of a professional tax preparer: Catching all the deductions you have coming to you, based on your unique situation. “Deductions are overlooked all the time,” Hockenberry said. Questions you might be asked (either by an accountant or tax-prep software) that could affect your return include:

  • Did you incur expenses for day care?
  • Did your child attend summer camp?
  • Was it day camp or overnight camp?
  • Did your child attend college?
  • Did your child have a summer job?
  • Did your child have investment income? How much?

If you decide to prepare your taxes online or use tax-prep software, see our guidelines for staying safe online, and read more about tax prep online.

   

E-mail Newsletters

FREE e-mail Newsletters!
Choose from cars, safety, health, and more!
Already signed-up?
Manage your newsletters here too.

Latest From Consumer Reports

PHONE & CARRIER GUIDE
How to save money on your cell phone planVideo As carriers try to attract customers, it's a good time to change plans.
COFFEEMAKER REVIEWS
Keurig 2.0 Brewer K550 offers more brewing optionsVideo But the latest Keurig machine rejects older K-Cups, angering consumers.
NEW CAR REVIEWS
Cheap cars you shouldn't get for your teen driver These poor choices have characteristics ill suited to inexperienced drivers.
HOSPITAL RATINGS
The surprising way to stay safe in the hospitalVideo Increase your odds by getting staff to listen and to treat you with respect.
SPACE HEATER REVIEWS
Space heaters that keep you and your room cozyVideo The latest crop of space heaters we’ve tested have improved safety features,
HOLIDAY GIFT IDEAS
Shipping comparison: FedEx vs. UPS vs. USPS Is the good ol' post office your best bet for sending packages?

Connect

and safety with
subscribers and fans

Follow us on:

Cars

Cars New Car Price Report
Find out what the dealers don't want you to know! Get dealer pricing information on a new car with the New Car Price Report.

Order Your Report

Mobile

Mobile Get Ratings on the go and compare
while you shop

Learn more