Your Guide to Taxes for Parents
Taxes | Child tax credit | Dependent care tax credit | July 2, 2025
This Week's Quote: "Procrastination makes easy things hard and hard things harder."
-Mason Cooley
To counter the high costs of raising children, Congress has sprinkled various breaks for parents throughout the tax code.
But you need to know where to look and to compare benefits. Funding a flexible-spending account for child-care expenses through your employer-benefits program might save you more than claiming the dependent-care tax credit. Education credits for college or job-skills classes are among the most overlooked, according to the IRS. If your child has unearned income, study up on the “kiddie tax.”
CHILD AND DEPENDENT TAX CREDITS
The maximum child tax credit for 2024 and 2025 is $2,000 per child under age 17 at year-end. This is a dollar-for-dollar reduction in taxes.
The credit begins to phase out at $400,000 of modified adjusted gross income for married couples filing jointly and $200,000 for single filers. A married couple with two children and MAGI of more than $480,000 wouldn’t get the credit.
Low and moderate earners may be eligible for a payment of up to $1,700 per child, even if they don’t owe income tax.
The credit for dependents who are age 17 and older at year-end, such as an older child or elderly relative, is up to $500. It has a similar income phaseout.
Use Schedule 8812 and its instructions to calculate and report the child tax credit and credit for other dependents. Longstanding rules define who is a dependent, as described in IRS Publication 501.
Various proposals to expand the child tax credit beyond $2,000 are being discussed as Congress considers the fate of the 2017 tax cuts.
CHILD-CARE EXPENSES
Flexible-spending accounts for dependent care
Flexible-spending accounts, or FSAs, are employer-sponsored plans that allow workers to set aside pretax dollars to pay certain unreimbursed expenses.
Parents can use funds in dependent-care FSAs to reimburse themselves for daycare and child care. This includes after-school programs and summer day camp for children under 13. The contribution limit is usually $5,000 per family, per year.
Workers’ contributions to FSAs aren’t subject to federal payroll taxes, or in many cases, state taxes.
Child- or dependent-care tax credit
Like dependent-care FSAs, the child- or dependent-care tax credit covers care expenses for children under 13. Both tax breaks can apply to expenses for dependents, such as older children with disabilities incapable of caring for themselves.
The credit is 20% of up to $3,000 of eligible expenses for one dependent, or up to $6,000 for two or more. For very low earners, the credit may be as high as 35%.
For middle- and upper-earning parents with marginal tax rates above 12%, a dependent-care FSA often lowers taxes more than this child-care credit. So these earners should consider maximizing contributions to the dependent-care FSA first.
Parents can claim the tax credit for care expenses that exceed their FSA reimbursements, but no double-dipping is allowed.
IRS Publication 503 explains the tests you must meet to claim the credit, and how to calculate the credit if you also receive dependent-care benefits from your employer.
SAVING FOR EDUCATION
529 plans
Parents and others can fund 529 college savings plans that allow for tax-free growth of assets for eligible education expenses such as college tuition and room and board. Some states offer state income-tax breaks for contributing.
There is no federal cap on contributions. But a federal gift-tax return may be required on annual contributions larger than $19,000 in 2025. Withdrawals are generally federal and state tax-free if used for eligible educational expenses.
Understanding Education Tax Credits
In recent years, Congress has expanded what is eligible for tax-free withdrawals: up to $10,000 per student, per year, for K-12 tuition; some costs for apprenticeships; repayments of some student loans, with a lifetime limit of $10,000 per borrower. Some states don’t allow state tax-free treatment for these distributions.
Savers can transfer 529 funds to 529 ABLE accounts, which are special savings accounts for people with a disability.
A provision of the 2022 retirement law allows 529 account owners to roll over some assets, tax-free, to a Roth IRA owned by the 529 plan’s beneficiary. The lifetime rollover limit is $35,000. The 529 account must have been open for at least 15 years, and only funds that have been in the account for at least five years are eligible.
Another type of 529 plan, including the Private College 529 Plan, allows parents to buy prepaid tuition certificates at current prices.
Coverdell education saving accounts
Education savings accounts are another way for parents to save tax-free for their children’s educational expenses. The accounts offer more investment options than 529 plans, but come with more restrictions. Annual contributions are capped at $2,000 per beneficiary, and income limits apply to those who set up the accounts. See IRS Publication 970 for more details.
MORE EDUCATION TAX BREAKS
The American Opportunity Tax Credit provides a maximum tax reduction of $2,500 per student per year. It is available for the first four years of postsecondary education and applies to tuition and course-related expenses but not room and board.
The Lifetime Learning Credit is typically less generous but applies to a broader range of expenses. The maximum tax reduction is $2,000 per return per year. It can be used for graduate education, continuing education and jobs-skills classes in addition to undergraduate education.
Taxpayers with student-loan interest can typically deduct up to $2,500 of it each year. The limit is per tax return, so single filers and married joint filers get the same amount.
All three benefits are subject to income phase-outs. See IRS Publication 970 for more details.
THE ‘KIDDIE TAX’
The unearned income of many children under age 24 who are dependents of their parents is taxed at the parents’ marginal income-tax rate. This tax, known as the kiddie tax, is complicated, but it often applies to the child’s investment income above $2,600 for 2024.
If your child’s only income is from interest, dividends and capital-gain distributions, and totals less than $13,000, you may be able to elect to include that income on your return rather than file a return for your child.
A dependent child must file a tax return if his or her income exceeds any of certain thresholds. These include unearned income of more than $1,300 or earned income of more than $14,600 or self-employment income of more than $400. Note, states have different filing thresholds.
In some cases, a dependent child might file a return to get a refund for taxes withheld. For children who have any W-2 or 1099 income, while they may not be required to file, it is advisable from an identity protection standpoint.
IRS Publication 501 spells out the filing requirements for dependent children. IRS Topic No. 553 has more details on the kiddie tax.
Credit goes to Ashlea Ebeling, The Wall Street Journal, February 26, 2025
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This Week’s Author, Mark Bradstreet