Parents in the U.S. are facing high costs when it comes to raising a child. As tax season approaches, it is important for parents to be aware of tax breaks related to children and care expenses.
CNBC reports, the cost of child care has significantly increased due to inflation. Many child care centers have also raised their rates as pandemic aid for child care expired, creating what is known as the child care cliff.
According to a survey by Care.com, 47% of parents spent over $1,500 per month on child care expenses in 2023. Additionally, 20% of parents paid at least $3,000 per month. The survey included 2,000 U.S. parents with children aged 14 or younger.
Sophia Bera Daigle, a certified financial planner and founder of Gen Y Planning, shared that she has clients who spend $5,000 per month on daycare for their three young children.
Fortunately, there are two tax credits available to help parents offset some of these costs. The child tax credit is designed to assist families in managing the expenses of raising a child. The credit was temporarily expanded during the Covid-19 pandemic but expired at the end of 2021. Lawmakers are now considering a bipartisan tax agreement that could increase the child tax credit starting in 2023.
The proposed changes would raise the maximum refundable tax break to $1,800 per qualifying child for 2023, with further increases in subsequent years. The child tax credit is available to all parents within certain income thresholds, with phase-outs beginning at an annual income of $200,000 or more for individuals and $400,000 or more for married couples filing jointly.
The child and dependent care tax credit is another option for working families to offset the costs of child care for children under the age of 13 and adult dependents. This credit is not limited to daycare expenses and can also include expenses for summer day camps. The credit is capped at eligible expenses of $3,000 for one qualifying child or $6,000 for two or more. The value of the credit can be up to 35% of these expenses, depending on income.
It is important to note that the child and dependent care tax credit is specifically for working single parents or dual-income working spouses. Stay-at-home parents are not eligible for this credit. Additionally, expenses paid for with funds from a dependent-care flexible spending account cannot be counted towards the tax credit.
