As Tax Day approaches on April 15, parents have a lot to consider when it comes to maximizing their refunds and saving on taxes.
Whether you're a new parent or have children in college, there are key tax breaks that can help boost your savings.
Lisa Greene-Lewis, a CPA and tax expert at TurboTax, and Tony Myers, a financial adviser at Northwestern Mutual, offered insights into how parents can take advantage of credits and deductions at various stages of their children's lives.
"Make sure to review your withholdings, keep track of your child care and education expenses and take advantage of all the credits and deductions available to you," Greene-Lewis said.
"Planning ahead and adjusting your withholdings now can help you maximize your savings and avoid surprises come tax time," she added.
By staying informed about the tax credits and deductions available for each stage of your child's life, you can ensure you're getting the most out of your tax return and setting yourself up for a financially secure year ahead, the experts said.
Having a baby is an exciting milestone, but it also brings new tax opportunities.
The Child Tax Credit is one of the most valuable benefits for new parents.
"The Child Tax Credit can provide up to $2,000 for each child under the age of 17," said Greene-Lewis. "Importantly, $1,700 of that credit is refundable, meaning you can receive up to $1,700 even if you don't owe taxes."
However, not all parents are eligible for the full Child Tax Credit. "There are income limits," Greene-Lewis explained. "For single parents, the threshold is $200,000, and for married couples filing jointly, it's $400,000. If your income is above these levels, the amount you receive will be reduced."
In cases where parents are not together, Greene-Lewis suggests they coordinate on who claims the dependent on the tax form. "It's important to discuss who will claim the child to ensure that both parents maximize their credits and deductions," she advised.
Myers adds that the Child Tax Credit can serve as a starting point for long-term financial goals. "We like to have our clients think of these credits as an easy way to work toward their savings goals. Taking that $2,000 and contributing it to a Dependent Care Flexible Spending Account (FSA) allows parents to pay for eligible childcare expenses with pre-tax dollars, which helps reduce taxable income," he said.
Another crucial tax benefit for new parents is the Earned Income Tax Credit (EITC), which can offer significant savings, particularly for lower to moderate-income households.
"The EITC is a refundable credit based on income and the number of children you have," Greene-Lewis said. "For tax year 2024, a family with three children could qualify for up to $7,830."
The IRS reports that many eligible parents miss out on this credit, so it's essential not to overlook it, noted Greene-Lewis.
As your child enters day care or preschool, the potential for tax savings continues to grow.
One of the most valuable resources for parents is the Dependent Care FSA, which allows parents to set aside pre-tax dollars for childcare expenses.
Up to $5,000 can be contributed annually to a Dependent Care FSA if you are filing jointly in 2025, Myers explained. This not only reduces your taxable income but also helps offset costs for day care, preschool or even summer camps.
Myers emphasized the benefit of a FSA in long-term planning. A FSA can be a useful tool for parents looking to reduce their taxable income now, freeing up more funds for savings later. It's an important part of managing finances effectively as your family grows.
"Parents can take advantage of a number of credits and deductions, especially when they are paying for childcare," Greene-Lewis said.
One such benefit is the Child and Dependent Care Credit, which can be up to $1,050 for one child and $2,100 for two or more children.
This credit can be used to offset daycare expenses for children under the age of 13, and even summer day camps or sports camps qualify, though overnight camps do not.
Parents who have not yet adjusted their tax withholdings could be leaving money on the table.
"By filling out the IRS W-4 form and submitting it to your employer, you can adjust your withholdings to account for the credits and deductions you're eligible for," Greene-Lewis said.
As children enter college, parents can continue to benefit from tax credits.
For those who have college-aged children, the American Opportunity Tax Credit (AOTC) can provide a credit of up to $2,500 per dependent.
"This credit is available for the first four years of college, as long as the child is enrolled at least half-time and pursuing a degree," said Greene-Lewis.
For older children who are taking college courses or acquiring job skills beyond the first four years of school, parents can claim the Lifetime Learning Credit, which provides up to $2,000 per tax return.
Greene-Lewis also pointed out that parents who are paying student loans for their children may qualify for a student loan interest deduction of up to $2,000. However, parents must claim their child as a dependent to take advantage of this benefit.
Myers also suggested parents consider 529 savings plans to help save for their child's higher education.
"A 529 plan is a tax-advantaged savings account that grows tax-deferred," Myers explained. "Withdrawals are tax-free if used for qualified education expenses, such as tuition, books, and room and board."
Another advantage of a 529 plan is its flexibility. "As of 2024, parents can roll over up to $35,000 into a Roth IRA for the named beneficiary if they do not use the full amount of the 529 for college or higher education," Myers noted.
This can be a smart way to preserve those funds for future needs.
Single parents can benefit from filing as Head of Household, which allows them to receive a larger standard deduction than if they filed as Single.
For 2024, the Head of Household deduction is $21,900, compared to $14,600 for those filing as Single.
"If you're providing more than half the support for your child, filing as Head of Household can help reduce your taxable income," Greene-Lewis said.
Summer can be an expensive time for parents, with day camps and sports camps to consider.
Fortunately, the Dependent Care FSA can help. "Parents can use a Dependent Care Flexible Spending Account (FSA) to save on child care expenses," Greene-Lewis said. "This includes summer day camps and other care costs."
A Dependent Care FSA allows parents to set aside pre-tax dollars to pay for eligible child care expenses, such as day care, summer camp, or after-school programs.
It's important to remember that overnight camps do not qualify for this benefit, said Greene-Lewis.
