Caring for your family has tax implications. Whether you're adopting a child, having a baby, paying for childcare, saving for your child's education, or caring for a disabled family member, if you're providing for your family, you'll need to think about the tax implications. To better understand the potential tax implications of caring for your family, we consulted H&R Block. Keep reading to learn some of the ways providing for your family could affect your taxes.
Becoming a Parent
Adopting a Child. According to the Internal Revenue Service (IRS), the adoption credit exists to make adoption possible for some families who could not otherwise afford it, by offsetting qualified adoption expenses up to a certain amount. If you have recently adopted a child, keep in mind that you may not qualify for the full amount and the credit phases out completely at certain income levels. You can learn more about the rules for claiming the adoption tax credit in "Six Things to Know about the Expanded Adoption Credit" on the IRS website. To claim the adoption credit, you must submit IRS Form 8839, Qualified Adoption Expenses along with the IRS-required documentation. To learn more about the documentation requirements visit Adoption Credit Documentation Requirements on the IRS website.
Raising a Child. If you claim your child as a dependent, you may also be eligible to claim the child tax credit, which could allow you to cut your tax bill up to $1,000 for each qualifying dependent child. There are limitations, however. You can learn more about child tax credit eligibility in H&R Block Tax Tip 12, Child Tax Credit or in IRS Publication 972: Child Tax Credit.
Choosing and Paying for Childcare
Paying for Childcare. You may qualify for the child and dependent care credit, a credit for costs (such as in-home care or daycare) that enable you and your spouse to work. To qualify, you must pay qualified costs for qualifying children under age 13, or for dependents of any age who live with you for more than half of the year and who physically or mentally cannot take care of themselves. To learn more about the child and dependent care credit, check out IRS Module 9: Tax Credit for Child and Dependent Care Expenses.
Planning for Your Child's Education
The U.S. government offers education tax credits and deductions to help offset certain education costs. You can pick up tips to reduce the cost of your child's education in "Five Ways to Offset Education Costs" on the IRS website.
Saving for Your Child's Education. Saving for your child's enrollment or attendance expenses (for kindergarten through college at any public or private school) can be done with a Coverdell Education Savings Account (Coverdell ESA). According to H&R Block, the contributions you make to a Coverdell ESA are not tax deductible but the amounts you deposit in the account grow tax free until they are distributed. Distributions to pay for qualified education expenses are also tax free. You can learn the potential tax advantages of saving for your child's education with a Coverdell ESA in H&R Block Tax Tip 21, Saving for Education, or by reading IRS Publication 970: Tax Benefits for Education.
You can also invest in your child's education through qualified tuition plans, some of which enable prepayment of qualified education expenses. To learn more about the tax implications of saving for your child's education through a qualified tuition plan, check out IRS Publication 970: Tax Benefits of Education.
Sending Your Kids to College. According to H&R Block, tax benefits such as the American Opportunity Credit and the Lifetime Learning Credit might be available to you if paying education costs for yourself, your spouse, or your dependent. However, most benefits apply only to higher education. These education benefits cannot be combined for the same student, so you should choose the one that is most beneficial to you and your family.
You might also be eligible to claim other education-related tax benefits. You can learn about them in H&R Block Tax Tip 20, Tax Breaks for Higher Education as well as IRS Tax Topic 457: Tuition and Fees Deduction.
Finally, keep in mind that you may also be able to save on the cost of education by deducting the interest you pay on qualifying student loans. To learn more about the student loan interest deduction, check out IRS Tax Topic 456: Student Loan Interest Deduction.
Raising Money-Savvy Kids
Investing on Behalf of Your Kids. Whether you're saving money to put towards your child's education or a deposit on his or her first home, if you invest in an account in your child's name, part of his or her investment income might be subject to tax at your highest marginal tax rate, depending on your child's age and the amount of investment income. To learn more about the "kiddie-tax" rules, read H&R Block's Kiddie Tax Overview.
Caring for Other Family Members
Paying for the Care of Disabled Dependents. You may qualify for the child and dependent care credit, a credit for costs (such as in-home care or day care) that enable you and your spouse to work. To qualify, you must pay qualified costs for qualifying children under age 13, or for dependents of any age who live with you for more than half of the year and who physically or mentally cannot take care of themselves. To learn more about the child and dependent care credit, check out IRS Module 9: Tax Credit for Child and Dependent Care Expenses.
Supporting Your Parents and Your Children. If you're a sandwich-generation taxpayer -- meaning you're responsible for caring for your parents while managing your own household and children -- you may be able to claim the $3,700 dependent exemption in 2011 for supporting your qualifying relatives, including your parents and grown children. Generally, you must provide more than 50 percent of the support of a U.S. citizen, U.S. national, or resident of the U.S., Canada or Mexico. Expenses which count as support include items such as food, lodging, clothing, education, medical and dental care, recreation, and transportation. Additionally, the dependent must generally have less than $3,700 in income for the year. To learn more about eligibility requirements for claiming the qualifying relative exemption, review H&R Block Tax Tip 13: Tax Deductions for Dependents or IRS Publication 501: Exemptions, Standard Deduction, and Filing Information.
Remember that every situation is unique. If you want to learn the tax implications of caring for your family, consult the IRS website. You can also learn more on H&R Block's website.
By Debbie DiVito, CPA, Content Manager, Women & Co.
About the Author:
As Women & Co.'s Content Manager, Debbie is responsible for creating original editorial content for Women & Co. In her role, Debbie couples more than seven years' experience supporting clients in the financial services industry with her passion for writing about important financial concepts in a way that is both unintimidating and fun. Debbie is a Certified Public Accountant, has undergraduate degrees in Finance, Multinational Business Operations, and Spanish from The Florida State University, and holds a Masters degree in Accounting from The University of Virginia.