Millennial Series Part V:  Tax Help for Having or Adopting Children

Posted on Tue, Aug 29, 2017 ©2021 Drucker & Scaccetti

By: Stefanie Ostrich, CPA


Welcoming a child into your life is among the most exciting life experiences.  Get ready to feel love like you never knew.  With the love, however, comes many new expenses, like diapers, formula and child care just to name a few.  However, there are multiple tax benefits and tax planning opportunities to help offset some costs. Let’s look at some of the more significant ones.



Usually you can claim a child as a dependent on your tax return starting with the tax year during which your child was born, even if your child was born on the last day of that year.


Exemptions:  If you can claim your child as dependent, then you will get an additional personal exemption on your tax return for your dependent child.  The personal exemption amount for 2017 is $4,050.  Remember there is a phaseout for exemptions.  In 2017 the phaseout starts at an Adjusted Gross Income (AGI) of $261,500 for single individuals, $313,800 for married filing joint filers and phases out at $384,000 for single individuals, $436,300 for married filing joint filers.


Child Tax Credit:  This credit is for people who have a qualifying child.  The maximum amount you can claim for the credit is $1,000 for each qualifying child.  You may need to reduce this credit if:


  1. Your AGI is more than $75,000 for single individuals, $110,000 for married filing joint or $55,000 for married filing separate.
  2. Your tax is less than the credit.


Child Care:

Child and Dependent Care Credit:  This credit is available to those who paid someone to care for their qualifying child under the age of 13, so they could either work or look for work (if your filing status is married filing joint, you must both be working or looking for work).  Qualifying costs include daycare or preschool for children below the level of kindergarten, before-school care or after-school care programs and summer day camp (not sleep away camp).  You must provide the name, address and taxpayer identification number for the caregiver and the amount paid to the caregiver.  To apply for the credit, you must complete Form 2441 and attach it to your tax return.  The maximum credit is $3,000 for one qualifying child or $6,000 for two or more qualifying children.  The credit is reduced for Dependent Care Benefits reported on your W-2 and may be subject to income limitations.


Dependent Care FSA (flexible spending account):  A Dependent Care FSA lets you contribute funds to an account through pre-tax payroll deductions which can then be withdrawn after submitting receipts for qualifying expenses mentioned under the Child and Dependent Care Credit.  Contributions to a Dependent Care FSA for 2017 are limited to $5,000, or $2,500 if your filing status is married separate.  These contributions will not be subject to federal withholding, social security or Medicare taxes and will be reported on your W-2.  If you do not use all your Dependent Care FSA funds in each year, the balance will be forfeited.    Also, note that 2% or more shareholders in S-Corps or partners in Partnerships do not qualify to participate in FSAs.


Medical Expenses:


Generally, any qualified medical expenses you incur for a dependent have the same deductibility limits if you incurred them for yourself.  This includes the ability to contribute to a Health Care Flexible Spending Account (FSA) for expenses for your dependent child(ren).


ABLE Accounts:  An ABLE account is a way to save for a blind or disabled person, while accumulating earnings not subject to federal tax when the distributions are used for qualified disability expenses.  Contributions to the ABLE account are not tax deductible and are subject to the annual gift tax exclusion amount ($14,000 for 2016), and a cumulative balance limit, which is set by each state.  Contributions to ABLE Accounts will be reported to you on Form 5498-QA.  Distributions from the ABLE account will be reported to you on Form 1099-QA and must be reported on Form 5329 with your tax return.



Tax benefits for adoption include both a tax credit for qualified expenses paid to adopt an eligible child and an exclusion from income for employer-provided adoption assistance.


Adoption Credit:  Qualifying expenses for the Adoption Credit include: reasonable and necessary adoption fees, court costs and attorney fees, traveling expenses, etc.  The credit is limited to your tax liability.  However, any credit greater than your tax liability may be carried forward for up to five years.  The maximum credit for 2017 is $13,570 per child.  This credit phases out for anyone with an AGI over $243,540.  Timing and eligibility issues may arise regarding if the adoption was successful and whether the adoption was domestic or foreign.  You cannot claim the credit if you file your return married filing separate.  To apply for the credit, you must complete Form 8839 and attach it to your return.


Adoption Assistance Programs:  Your employer may have an Adoption Assistance Program.  If you use this benefit, the employer assistance should be excluded from your taxable income, but reported on your W-2 and complete Part III of Form 8839.  The exclusion from your income of benefits from the Adoption Assistance Program has the same income phaseout as the Adoption Credit mentioned above. 


Other Tax Credits:

Earned Income Tax Credit:  The Earned Income Tax Credit is available to working people with low to moderate income.  The credit cannot be claimed by those married filing separate, you and your spouse (if married filing joint) must both have earned income, your investment income must be $3,400 or less.  You must be at least age 25 but less than age 65, and your AGI must fall under certain thresholds depending on the number of children you have.


We all love being parents and dote on our children whenever we can. But, it’s no secret children increase family expenses. The tax breaks available to help parents and guardians defray some costs are many, and they can get confusing.  Talk to a tax strategist about maximizing opportunities for the tax benefits of being a parent.  If you need a tax strategist, call on us at Drucker & Scaccetti.  We are always prepared to help.

Topics: children, Adoption, credits, Taxes, birth, parents, Millennials, tax strategist, parenting

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