Raising kids is expensive. By my estimate, it can cost close to $500K to raise a child, including college, in expensive parts of the country like the Bay Area. So, it’s helpful to know that there are certain tax advantages to having kids. A few of the more common ones are outlined below.

  1. Child Tax Credits & Deductions. There are a variety of tax credits and deductions for parents, but many phase out at various income levels. Below are a few with higher income phase-outs.
    • Child Tax Credit provides a credit of $1,000 for every child under 17 in your care, but starts phasing out at $110K in adjusted gross income (AGI) for joint filers and $75K for single filers.
    • Dependent Care Tax Credit provides a 20-35% credit up to a $3,000 credit for qualified (i.e., above the table) child care expenses for children under 13. The credit is up to $6,000 for two or more children and will depend on your income. Even a high earning couple can claim a $600 credit for one child or $1,200 for two or more kids.
    • Dependent Care Flexible Spending Account. Many employers allow employees to set aside up to $5,000 per year in pre-tax income to pay for child care. However, this amount must be excluded from the expenses used to calculate the credit above.
  2. Education Tax Credits & Deductions. There are several federal tax credits for college expenses.
    • The American Opportunity Tax Credit allows for a $2,500 credit per year for tuition and related expenses for the first four years of college, but phases out after AGI of $80K for single filers and $160K for joint filers. It is per student.
    • The Lifetime Learning Credit provides a $2,000 credit for education expenses, but can be used for non-degree and career skills programs as well. It applies per household and phases out at $65K for single filers and $130K for joint filers.
    • Education Expense Deduction allows you to deduct up to $4,000 of qualified education expenses from your income, but phases out at $80K of AGI for singles and $160K for joint filers.
  3. Tax-favored College Savings. While putting money into a 529 account or Coverdell Educational Savings Account for college isn’t tax deductible on your federal return, the money grows tax-free and isn’t taxed upon withdrawal, if used for qualified education expenses.

In summary, there are a variety of tax savings to help take the bite out of raising children. Consult your tax advisor to decide which ones are best for your family.