Dependent Tax Credits and Deductions

1. Child and Dependent Care Tax Credit

The Child and Dependent Care Tax Credit (CDCTC) is a tax credit that helps working families pay expenses for the care of children, adult dependents or an incapacitated spouse. Families can claim up to $3,000 in dependent care expenses for one child/dependent and $6,000 for two children/dependents per year. The credit is worth between 20 percent and 35 percent of these expenses, depending on a family’s income.

Eligible families with adjusted gross income (AGI) of $15,000 or less can claim 35 percent of these expenses for a maximum potential credit of $2,100. The percentage of expenses a family can claim steadily decreases as income rises, until families with AGI of $43,000 or more reach the minimum claim rate of 20 percent, qualifying for a maximum potential credit of $1,200.

Unlike the Earned Income Tax Credit and the Child Tax Credit, the CDCTC is non-refundable. This means that if a family does not earn enough money to owe federal income taxes, it cannot benefit from the credit.

Expenses that may qualify include:

Education expenses: Payments made to a nursery, preschool or other programs below the level of kindergarten.
Before and after school care: Amounts paid to care for your kids for before or after school care.
Summer camp: Expenses paid for summer camp (however, overnight camp expenses do not qualify as the credit is meant to help parents during standard working hours.)
Transportation costs: Amounts paid to a care provider for transportation to and from where the care is provided.
Care outside of your home: The cost of care provided outside of your home paid to a dependent care center or a qualified personal care provider.

2. Child Tax Credit (CTC)

The Child Tax Credit helps families with qualifying children get a tax break. You may be able to claim the credit even if you don't normally file a tax return.

Who Qualifies

You can claim the Child Tax Credit for each qualifying child who has a Social Security number that is valid for employment in the United States.

To be a qualifying child for the 2023 tax year, your dependent generally must:

Be under age 17 at the end of the year
Be your son, daughter, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, half-brother, half-sister, or a descendant of one of these (for example, a grandchild, niece or nephew)
Provide no more than half of their own financial support during the year
Have lived with you for more than half the year
Be properly claimed as your dependent on your tax return
Not file a joint return with their spouse for the tax year or file it only to claim a refund of withheld income tax or estimated tax paid
Have been a U.S. citizen, U.S. national or U.S. resident alien

You qualify for the full amount of the 2023 Child Tax Credit for each qualifying child if you meet all eligibility factors and your annual income is not more than $200,000 ($400,000 if filing a joint return).

Parents and guardians with higher incomes may be eligible to claim a partial credit.

3. Earned Income Tax Credit

The EITC is a credit designed to help reduce poverty and encourage work participation for low- to moderate-income taxpayers.

The EITC is based on a percentage of your earned income. Examples of earned income include wages, tip income and net self-employment income. However, unemployment income, alimony, child support or interest aren’t considered earned income for the EITC.

While you do not need to have a child to claim the credit, parents can get a higher tax credit when they have kids that qualify for the EITC.

A child qualifies for the credit if they:

Have a valid Social Security number
Are under the age of 19 (24 if enrolled in college full-time)
Have a relationship with you
Lived with you for at least half of the year in the United States

You need to meet the income threshold to claim the EITC, which differs based on your filing status and the number of your children. For example, a married couple with three or more children can qualify with an income of up to $56,844 ($57,414 for 2021). A single tax filer may qualify if they earn less than $50,594 ($51,464 for 2021).

How much you receive also depends on your income and number of children. The maximum credit for 2020 is $6,660 and rises to $6,728 for 2021.

4. Education Tax Credit

The American Opportunity Tax Credit (AOTC) is a tax credit available to parents who paid qualified education expenses for their kid’s first four years of college. You can claim expenses paid for tuition, fees and course materials.

You can claim up to $2,500 per child. That works out to be 100% of the first $2,000 you paid and 25% of the next $2,000. The AOTC is partially refundable of up to $1,000, which means if you do not owe taxes, qualifying taxpayers can receive a refund of up to this amount.

You must receive a Form 1098-T (Tuition Statement) from an eligible educational institution, like a college, university or trade school, to claim the credit. In addition, your modified gross income (MAGI) must be $80,000 or less ($160,000 if married). If you earn more than this amount, you may receive a reduced credit or no credit at all.

5. 529 State Tax Plans

A 529 state plan is an account to help save for your children’s education expenses.

Each 529 plan is sponsored by a state agency, and all 50 states and the District of Columbia have at least one 529 plan.

There are two types of 529 plans: a prepaid tuition plan and an education savings plan. A prepaid tuition plan allows you to purchase credits at a college or university for future attendance. An education savings plan allows you to save for your child for college, trade schools, elementary or secondary school.

While contributions made to a 529 plan are not deductible for federal tax purposes, it does provide other tax advantages. One tax advantage is that most states offer a tax deduction for contributions made to a 529 plan.

If the money in the account is used for qualified education expenses, the returns earned on the contributions are not subject to federal income taxes. However, if your 529 accounts are not used for qualified education expenses, it may be subject to an additional tax penalty of 10% plus income taxes on the earnings.

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