As inflation continues to drive up the cost of raising children, taxpayers can take advantage of tax benefits designed specifically for parents. Understanding and comparing these benefits is crucial for maximizing tax savings.
James Lee, president of the Korean American CPA Society of Southern California (KACPA), emphasized the importance of being well-informed about available tax credits.
“While individuals can file taxes independently, they must be aware of the range of benefits and its limitations,” Lee said, adding “Consulting a professional accountant may help ensure accurate filing and maximize available deductions and credits.”
Parents can consider several tax-saving opportunities to ease their financial burden.
Child Tax Credit
The Child Tax Credit (CTC) remains a valuable benefit. For 2024 and 2025, parents can receive up to $2,000 per child under 17. However, the credit begins to phase out for married couples filing jointly with a modified adjusted gross income (MAGI) over $400,000 and for single filers earning over $200,000. Households with a MAGI exceeding $480,000 are ineligible for this credit.
Childcare Expense
Another key tax benefit is the Dependent Care Flexible Spending Account (FSA), which allows parents to use pre-tax dollars for childcare expenses. This employer-sponsored benefit can be used to cover costs such as after-school programs and summer camps for children under 13. Families can contribute up to $5,000 per year tax-free, significantly reducing taxable income.
Education Expense
For those saving for education, the 529 Plan remains one of the most popular options. This tax-advantaged savings plan allows funds to grow tax-free when used for qualified education expenses, including college tuition, room and board, and even up to $10,000 per year for K-12 tuition. Additionally, it can be used to repay up to $10,000 in student loans per beneficiary.
AOTC and LLC
Parents of college students can also benefit from education tax credits. The American Opportunity Tax Credit (AOTC) provides a tax reduction of up to $2,500 per student per year for the first four years of college. This credit applies to tuition and textbooks but excludes room and board.
For those pursuing graduate or vocational education, the Lifetime Learning Credit (LLC) offers a maximum $2,000 credit annually with no limit on the number of years it can be claimed. Additionally, parents paying student loan interest can deduct up to $2,500 per year from taxable income.
Kiddie Tax
However, parents with children earning passive income should be aware of Kiddie Tax rules. If a dependent under age 24 has investment income—such as interest and dividends—exceeding $2,600 in 2024, that income will be taxed at the parent’s marginal tax rate rather than the child’s lower rate. Dependent children must file a tax return if they earn over $1,300 in unearned income, $14,600 in wages, or $400 in self-employment income in 2024.
BY HOONSIK WOO [woo.hoonsik@koreadaily.com]
