Raising children is expensive, but at least the kids save you money on taxes. The Internal Revenue Service (IRS) provides numerous tax benefits for taxpayers with children, including dependency exemptions, child care credits and tax deductions for some child-related expenses.
Every child that you claim as a dependent on your tax return automatically reduces your taxable income by $3,800 as of 2012. This means if you are taxed at 15 percent, each kid saves you $570 in taxes ($3,800 x 0.15).
Child Tax Credit
If you have children under the age of 17, you can claim a $1,000 child tax credit for each child. Since a credit is a dollar for dollar reduction of your income tax liability, this can be a huge tax savings. For example, if you have two kids under age 17, you can reduce your tax liability by a full $2,000 ($1,000 x two kids).
Child Care Credits
Another tax credit you might qualify for is the Child Care Credit. This credit may be claimed if you pay somebody else to watch your child or children while you work. For example, if you pay a daycare $20 each day to watch your two kids, you can claim up to $2,100 in tax credits (assuming you paid that much in total daycare fees). Just remember to keep a written record of the child care fees, such as receipts and checks for payment.
If you adopt a child under 18, you can claim an additional credit worth up to $12,650 as of 2012. You can deduct all qualified adoption expenses, including state-imposed fees, attorney costs and fees, home evaluation fees and filing fees.
If your child goes to school and you still claim the child as a dependent, you can take advantage of several education-related tax benefits. First, you may qualify for the American Opportunity or Lifetime Learning Tax Credits (though you can only claim one of those credits, but not both, for each tax year). If you help a child obtain or repay student loans, then you can deduct up to $2,500 in student loan interest. You can deduct the student loan interest even if you don’t itemize your deductions (meaning you claim the standard deduction).