9 Valuable Tax Breaks Parents Can Take Advantage of Right Now

parents doing work on laptop
A couple reviews work on their laptop while their children play around them. Getty/fizkes

Along with the prospect of $1,400 stimulus payments, parents have another reason to cheer President Joe Biden's $1.9 trillion pandemic relief package currently working its way through Congress: The legislation contains a big tax break specifically for Americans with children under 18 that could give families $250 to $300 a month per child. You don't have to wait for the plan to become law, though, to grab existing breaks that could cut your tax bill or increase your refund this year by hundreds, or even thousands, of dollars.

Most of the credits and deductions currently in the tax code focus on helping parents with the cost of childcare and education. But there's also a credit—essentially, a more modest version of the one currently in the Biden relief plan—that rewards families for simply having children. And while many of the existing tax breaks are limited by income, not all of them are and, where there are restrictions, in some cases the cutoffs are higher than those for stimulus payments, allowing more parents to qualify.

You can't nab the savings, though, unless you know what deductions and credits to look for. Here's a look at nine of the most generous and commonly used tax breaks available to parents now as you fill out your return this year.

Child Tax Credit

The current Child Tax Credit, which was last expanded in 2018 when it doubled in value, allows parents and other legal guardians to reduce their tax bill by up to $2,000 per child under the age of 17. The best part? The credit is partially refundable, meaning if you don't owe any federal taxes, you can receive as much as $1,400 back as a refund for each child who qualifies.

If you have dependents who are 17 or 18 years old or who are full-time college students, between the ages of 19 and 24, you could also receive a nonrefundable credit of up to $500 per each of these young adults.

The income limits are higher than for stimulus relief so you can claim the full credit even if you make up to $200,000 as a single, or $400,00 if married filing jointly. Once you pass those thresholds, the credit begins to phase out gradually, says Robert Tobey, a New York-based CPA with Grassi & Co. Still, most households with kids qualify: The Tax Policy Center estimates that 90 percent of families with children received an average Child Tax Credit of $2,380 in 2020.

In light of the pandemic, the IRS is allowing families to use either their 2019 or 2020 income when calculating the value of the credit on their 2020 tax return, so it's worth asking your CPA or tax preparer to run your return with both figures to net the biggest tax break possible or do it yourself if you use tax-preparation software.

If Biden's American Rescue Plan passes, this break will become even more rewarding, temporarily increasing to $3,600 per child under age six and $3,000 for older children. It will also be fully refundable for 2021, so if you don't owe anything in taxes you'll get the full amount, with payments coming to families monthly instead of when they file their return next year.

This new version of the credit will be more targeted though, extending the full benefit to those with incomes below $112,500, if filing as head of household, or $150,000, if married filing jointly, and would phase out entirely at $200,000 in income for singles and heads of households, or $400,000 for married couples. While about 3 million fewer households would qualify for this expanded credit, those over the more stringent income limit could continue to claim the existing $2,000 credit as usual, according to The Tax Policy Center.

Additionally, though Biden's plan is still being debated, House Democrats have already called for making the proposed expansions to the credit permanent, with families receiving up to $300 per month for children under age 6 and $250 for older kids.

The idea has support across the aisle as well. Senator Mitt Romney has proposed a similar idea with the same advanced monthly payments for families coming from an expanded Child Tax Credit, however, his plan also calls for the elimination of three other popular tax breaks: the head of household filing status, the child and dependent care credit (discussed below), and the state and local tax, or SALT, deduction.

Child and Dependent Care Tax Credit

A typical family in the U.S. spends between $9,200 and $9,600 a year on childcare—that's about 10 percent of the average income for a married couple or 34 percent of a single parent's, according to research by Child Care Aware of America.

This tax credit allows you to claw back at least a small portion of all those dollars spent on daycare, after-school programs and even summer day camp costs in 2020. If you paid for someone to look after your kid so you could work or search for work, you may be able to claim between 20 percent to 35 percent of such expenses, up to a maximum of $3,000 for one child, or $6,000 for two or more children, off your tax bill.

Lower income families get the biggest credit, but anyone with childcare expenses qualifies. There are no income limits to claiming it. For instance, someone making less than $15,000 can take the most off, 35 percent of childcare costs, but anyone making more than $43,000 can still get 20 percent off. In between these two figures? IRS publication 503 breaks down all the rates.

Only care provided to children under age 13 or older dependents who are not physically or mentally able to look after themselves counts. And you must provide the tax identification number of the person or organization providing care for your offspring, meaning if you pay a nanny or babysitter under the table or use your spouse, elder children or the child's other parent to look after the kids while you're working, you're out of luck.

"You also cannot double dip," warns CPA Susan Allen, senior manager of tax practice and ethics for the American Institute of CPAs. Any money your employer gives you to help pay childcare expenses or any money you have withheld from your paycheck for that purpose, which can be excluded from your taxable income like contributions to a Flexible Spending Account, must be subtracted from your eligible expenses, she adds.

This means if you spent $6,000 on daycare costs for your two kids in 2020, but put $5,000, the maximum allowed, in an FSA to help cover that bill, you can only use $1,000 of expenses when figuring the credit rather than $6,000, since that is what is left after subtracting the FSA contributions.

Earned Income Tax Credit

This credit isn't just for parents, but its value does increase if you've got dependents—knocking off as much as $6,600 from your tax bill if you have three or more children.

Just how large your Earned Income Credit could be depends on your income as well—though anyone earning more than $56,844 will be ineligible regardless of how many kids they have. The table below breaks down the income parameters needed to qualify.

Number of Children or Relatives ClaimedMaximum Income(filing as Single, Head of Household or WidowedMaximum Income(filing as Married Filing Jointly)
Zero$15,820$21,710
One$41,756$47,646
Two$47,440$53,330
Three or More$50,594$56,844

As with the Child Tax Credit, you can also use your 2019 income in calculating whether you qualify this tax year, thanks to changes made to provide relief to those struggling because of the pandemic.

Adoption Credit

Adopted a child last year? Congratulations—now let Uncle Sam help you defray some of those costs, which can run as much as $45,000 for a baby from the U.S., according to the Child Welfare Information Gateway, run by the U.S. Department of Health and Human Services.

Under this generous credit, you can claim up to $14,300 of adoption fees, court costs, attorney fees and traveling expenses off your tax bill, says Tobey. The credit isn't refundable, so you can only use it to reduce your tax bill; it won't enhance your refund check. But you can use any amount of the credit left to reduce your tax bill over the next five years.

The credit gradually gets lower for those with incomes above $214,520 and ends completely for those earning $254,520 or more. To qualify, the adopted child must be under the age of 18 or be physically or mentally incapable of caring for themselves.

Unlike other tax credits, the value doesn't renew each year. Instead, $14,300 is the most you can claim for the adoption of the same child across all tax years. This means if you racked up some expenses in 2019 and received $3,000 worth of the adoption credit then, you can only claim up to $11,300 in costs on this tax return.

American Opportunity Credit

Helping to foot the bill for your child's college tuition, books or other supplies? You may be able to claim a credit worth up to $2,500 per student on your 2020 tax return. Even better: up to 40 percent of the American Opportunity Credit is refundable.

To qualify, your income must be below $90,000, or $180,000, if you're married. (You will receive a reduced credit if your income tops $80,000, or $160,000 if married.) And your child must have been enrolled at least half-time during one academic period in 2020, or within the first three months of this year if you pre-paid the bill last year, in a program that leads to a degree, certificate or other recognized credential.

You can only claim this credit for the same student for four years max, meaning if your kid is still pursuing their bachelor's degree or certification beyond that point—the average student takes just over five years to get their BA—you'll need to look into one of the other credits or deductions available for education costs.

Lifetime Learning Credit

If you're already planning on claiming the American Opportunity Credit to help defray your child's education costs, you won't also be able to take advantage of this tax break. The IRS limits you to choosing one of the two each year for each dependent's school expenses.

However, parents or guardians with multiple students can opt to claim the American Opportunity Credit for one kid and the Lifetime Learning Credit for another in the same year.

"If you have the choice, the American Opportunity Credit will always be greater than the Lifetime Learning Credit," according to the IRS. Unlike the American Opportunity Credit, the Lifetime Learning Credit has no time limit, so you can use it for as many years as you have qualified education expenses, says Allen. But the credit is also worth less, up to $2,000 per tax return, and is not refundable.

The credit begins to gradually phase out for those with incomes above $59,000 or $118,000 if married, before ending completely for those with more than $69,000 in taxable income, or $138,000 if married.

Tuition and Fees Deduction

All the other tax breaks mentioned on the list are credits, meaning they directly cut your tax bill dollar for dollar, but a deduction operates differently, reducing the amount of income you pay taxes on. Because of this, "credits are more valuable than deductions," says Tobey.

Still, if you cannot use the American Opportunity Credit or the Lifetime Learning Credit, this deduction can provide some welcome relief on education costs, allowing up to $4,000 to be subtracted from your taxable income without having to itemize.

Your income must be $65,000 or less, or $130,000 or less for married couples filing jointly, to qualify for the full $4,000 deduction. If your income is above those thresholds but below $80,000, or $160,000 if married, then your maximum deduction is capped at $2,000. Earn above that and you won't get any help.

You can't combine this deduction with any of the other education credits on your tax return.

Student Loan Interest Deduction

Those paying off education loans for their children's schooling can offset the sting of such bills somewhat by deducting up to $2,500 of the interest paid on that debt in 2020 from their taxable income, without itemizing.

Both federal and private education loans count toward this deduction, as can credit card debt, if it was only used to pay for qualified education expenses. Any loans made by a family member or qualified employer plan for college costs, however, don't, says Allen.

To get the full deduction, your income must be $70,000 or less, or $140,000 or less for married couples. If you earn more, the deduction will gradually be reduced before phasing out entirely for those making above $85,000, or $170,000 for couples.

Be warned though that this tax break might not be as rewarding as it typically is thanks to COVID-19 relief measures passed by the government in March last year, which suspended loan payments and dropped the interest rate to zero percent on federal student loans owned by the Education Department.

529 Contribution Tax Credit or Deduction

While the federal government doesn't reward parents for putting money aside for their kids' college fund through a 529 plan, 34 states and Washington, D.C. do, by offering either a state income tax deduction or credit.

In most states, you'll need to be contributing to your home 529 plan, rather than one offered by a rival state, in order to get the tax deduction or credit, but seven don't care where you've parked those college savings. Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana, and Pennsylvania will all award a state tax break for funding any plan.

Typically states allow either the full amount or a portion of 529 plan contributions to be deducted from your taxable income, but Indiana, Utah and Vermont offer a tax credit instead, while Minnesota residents may be eligible for either depending on how much they make.