Children are one of the greatest blessings that can be bestowed upon a family. However, the costs of caring for a child are high, and in recent years, these expenses have only grown higher. In fact, research has shown that growth of child care costs have largely outpaced household wages in recent years, making it challenging for families to grow their wealth and reach a stronger financial position. The good news is that the Internal Revenue Service offers some relief for parents in the form of tax credits, and these breaks may become more important in the future as expenses continue to grow.
Data from Child Care Aware of America shows that the average cost of child care rose 2.6 percent last year at day-care centers and 4.8 percent for home-based care, MarketWatch reports. Meanwhile, family income after taxes and other deductions rose by just 0.6 percent, and the overall cost of living grew by 1.6 percent. However, families that take advantage of the Child Tax Credit and the Child and Dependent Care Credit may see some financial benefits during filing season.
The Child Tax Credit may be worth as much as $1,000 for each qualifying child depending upon the parents' income. In order to claim it, however, certain tests must be met. For instance, the child being claimed must be under age 17 at the end of the tax year, and must not have provided more than half of their own support during this period. In addition, taxpayers must claim the child as a dependent on their returns. The person being claimed must also meet the relationship test. To claim a child for purposes of the Child Tax Credit, they must either be the claimant's son, daughter, stepchild, foster child, adopted child, brother, sister, stepbrother, stepsister or a descendant of any of these individuals, which includes grandchildren, nieces or nephews.
Finally, the child must be a U.S. citizen, U.S. national or U.S. resident alien, and resided with the taxpayer for more than half the year.
Child and Dependent Care Credit
Parents who face high daycare costs may also qualify for another credit to help them manage these expenses. Similarly, certain rules must be met. A dependent child must be age 12 or younger when the care was provided, and the care must have been necessary for parents to work or seek out employment. Additionally, filers must have earned income from wages, salaries, tips, other taxable employee compensation or net earnings from self-employment.
The child must have also lived with the taxpayers for more than half the year. When it comes to both of the credits, a number of exceptions, restrictions and income stipulations may apply, making it important to consult with a tax preparer before claiming them.
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