Learn How Your Children Can Lower Your Tax Bill by Joanie B. Stein, CPA

Posted on August 09, 2016 by Joanie Stein

Raising children can be expensive.  However, the IRS provides families with some financial relief through several tax benefits that help parents reduce the amount of taxes they owe each year.


Dependent Deductions.  Parents may reduce their annual income by claiming a dependent deduction of up to $4,050 in 2016 for each child under the age of 19, or 24 if the child is a full-time student.  The amount of the deduction decreases as parents’ adjusted gross income increases above $311,300 for married couples filing jointly, $285,350 for head-of-household taxpayers or $259,400 for single filers. The exemption phases out completely when adjusted gross income reaches $433,800 for married couples filing jointly, $407,850 for head-of household taxpayers or $381,900 for single filers.


Child Tax Credit. Parents may reduce their federal tax bills by $1,000 annually for every child under the age of 17 who lives with them for at least one-half of the year. The credit, which is limited by the amount of income tax and alternative minimum tax (AMT) owed, phases out completely for taxpayers whose income exceed $110,000 for married couples, $55,000 for couples filing separately and $75,000 for all other taxpayers.


Adoption Credit. Taxpayers who adopted a child in 2016 may offset some of the related expenses they incurred by claiming this credit of up to $13,400 per child.  The adoption credit phases out for taxpayers whose income exceeds certain thresholds.


Child and Dependent Care Credit. Families that pay for someone else to care for their dependent children under the age of 13 while the parents work or look for work may claim a credit for a percentage of the expenses paid to the caregiver. For 2016, the total expenses used to calculate the credit may be up to $3,000 for one dependent or up to $6,000 for two or more qualifying dependents. The allowable percentage of the credit depends on the taxpayer’s adjusted gross income.


Higher Education Credits.  The American Opportunity Credit and the Lifetime Learning Credit provides parents with the ability to offset some of the costs they pay for their children’s’ college and non-degree expenses.  Families may claim only one of the credits, both of which are subject to modified adjusted gross income thresholds.


Student Loan Interest. Qualifying families may deduct up to $2,500 in interest paid on student loans during the tax year.  The deduction is reduced when taxpayers’ modified adjusted gross income exceeds $65,000 for single heads of household or $130,000 for married filing jointly.  The deduction phases out completely at $160,000 for married taxpayers filing jointly and $80,000 for single filers.


Self-Employed Health Insurance. Parents with their own businesses who paid for health insurance for children under age 27, may deduct the premiums they paid during the year.


It is important that families pay attention to the income thresholds for which these deductions and credits apply. In some instances, it may be prudent for high-net-worth families to consider filing separate tax returns for children, rather than claiming them as dependents. At the very least, a family should meet with a tax accountant to compare the benefits of each.


About the Author: Joanie B. Stein, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where she helps individuals and businesses implement sound tax-planning strategies. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or at