Tax Incentives and 529 Student Savings Plans for Parenting in the U.S.

What you need to know about raising children in the United States are tax incentives and educational savings options. Child tax credits and childcare expense credits provide financial support to families raising children, and 529 student savings plans are gaining attention as a way to save for a child’s education.

What is the Child Tax Credit (CTC)?

It is a system that allows families with dependent children in the United States to receive a tax deduction. If you have a dependent Qualified Child on your personal tax return (Form 1040), you may apply for a child exemption for each child to reduce your tax liability.

The maximum child tax credit is $2,000 for each eligible child.

For tax years beginning 2018-2025, $2,000 deduction per child if your Modified Adjusted Gross Income exceeds $200,000 ($400,000 if you file jointly). It will be phased out or reduced.

For tax years beginning after 2025, the phase-out threshold will be $110,000 for married couples filing jointly, $55,000 for married couples filing separately, and $75,000 for other taxpayers.

What are the child support requirements for the child tax credit?

• Be 16 years old or younger at the end of the year.
• Be a son, daughter, stepchild, eligible foster child, brother, sister, brother-in-law, sister-in-law, half-brother, half-sister, or descendant of any of these (grandchild, niece, nephew, etc.);
• Financial support for more than half of eligible children throughout the year.
• Living together for more than half a year.
• Be properly declared as a dependent on your individual income tax return.
• The child has not filed a joint return with his/her spouse for the tax year or, if he or she has filed the return himself/herself, is filing the return only to claim a refund of withheld income tax or estimated tax.
• The child is a U.S. Citizen, U.S. National, or U.S. resident alien.

If your dependent child does not have a Social Security Number (SSN), you will apply for an Individual Taxpayer Identification Number (ITIN).

Special rules apply to child support claims for children whose parents are divorced or legally separated.
The Tie-Breaking Rule also applies to child support claims if the child meets the requirements to be an eligible child of more than one taxpayer.

What is the Additional Child Tax Credit (ACTC)?

The child tax credit is $2,000 per child, but if for some reason you cannot deduct the full $2,000, you can get a refund of up to $1,600 on your tax return for 2023. This refundable tax credit is called an additional tax credit. The Child Tax Credit (CTC) is a Non-Refundable Credit, while the Additional Child Tax Credit (ACTC) is a Refundable Credit.

What is the Credit for Other Dependents?

If you have a dependent child over the age of 17 who are not eligible for the child tax credit, you may claim credits for other dependents.
Other dependent deductions are available not only for a child, but also for dependent parents and unrelated dependents living with the taxpayer.

The maximum deduction for other dependents is $500 for each qualifying dependent.

For tax years beginning 2018-2025, a $500 deduction for each dependent if your Modified Adjusted Gross Income exceeds $200,000 ($400,000 for married couples filing jointly) will be phased out or reduced.

For tax years beginning after 2025, the phase-out threshold will be $110,000 for married couples filing jointly, $55,000 for married couples filing separately, and $75,000 for other taxpayers.

The deduction for other dependents can reduce your tax liability, but it is not a deduction that will be refunded to the taxpayer if the full $500 is not deducted. (Non-Refundable Credit)

Under what conditions can I claim the Child and Dependent Care Credit?

Expenses paid by single or dual-income couples who have a job to babysitters, nursery schools, and day care centers for children under the age of 12 are covered. To be eligible for this deduction, you must be earning service income (salary or self-employed business income).

In addition to childcare expenses, this deduction also includes care expenses for persons with disabilities (including spouses) and the elderly.

If you are a married couple, you must file a joint tax return for married couples.

However, if you are legally separated or have been separated from your spouse for more than half a year, you may be allowed to make an exception even if you file separate tax returns for married couples.
If you are divorced or separated and you are the custodial parent, you may be able to claim this child care expense deduction.

How much can I deduct for childcare expenses?

Annual childcare expenses are capped at $3,000 for one child and $6,000 for two or more. Eligible expenses are those that are paid to ensure the health and protection of the child.

If you have any childcare benefits, such as from your employer, you must deduct the amount of those benefits from your cap.

What is a 529 Student Savings Plan?

College tuition in the United States has skyrocketed over the years, and in the 2022-2023 tuition year, public colleges in the state cost $23,250 a year, while private colleges cost $53,430. In order to cover these educational expenses, parents need to raise various funds. One of the most beneficial is the 529 Student Savings Plan. This plan offers a flexible account with no income limits and tax benefits. As the name is derived from Section 529 of the Internal Revenue Code, it is designed as a place to grow assets for the future.

Versatility and Flexibility
In addition to college, the 529 Student Savings Plan can also be used for elementary and high school tuition (up to $10,000 annually). Also, it can be applied to full-time student tuition, fees, books, consumables, study materials, room charges, meals, etc. for full-time students at accredited educational institutions if going to college or graduate school.

Account opening and operation
A parent or grandparent designates a child as a beneficiary and opens the plan. The plan, which is sponsored by many states, is administered in partnership with financial services companies. Investor account holders can determine and monitor the use of funds. This allows us to control when the money is used for non-educational purposes, while still giving us the flexibility to transfer it to different beneficiaries.

Income tax benefits
Contributions to the California 529 Student Savings Plan are not deductible at the federal or state level, but the portion of the proceeds invested is tax-free when used for prescribed educational expenses.

Gift tax and inheritance tax benefits
The 529 Student Savings Plan may offer additional wealth planning benefits. “Contributions to the 529 Student Savings Plan are considered ‘completed gifts’ for inheritance tax purposes. Therefore, even if the accounts are under the account holder’s control, they are exempt from the account holder’s taxable estate.

In 2023, you will be required to file a gift tax return (Form 709) for gifts greater than $17,000 ($34,000 for married couples) annually. Amounts in excess of the annual gift tax exempt amount must be counted toward the individual’s lifetime gift tax exemption limit. The federal lifetime gift tax exemption limit is $12.92 million per person in 2023. (California does not enforce gift taxes.) The 529 Student Savings Plan allows contributions of $85,000 (joint taxpayers may fund $170,000) per beneficiary in a single year (2023), which he pays over five years. You can treat it as if you are contributing. You can contribute large sums to the 529 Student Savings Plan without compromising lifetime gift tax deductions.

Future ready and flexible
The 529 Student Savings Plan is an attractive option when it comes to planning your wealth for the future. If you have a child or a grandchild who are preparing to go on to college, this plan can be an effective way to support his or her education. The sooner you start, the longer you’ll be able to take advantage of tax deferred growth and generous contribution limits.

Working with the Roth IRA
Beginning in 2024, you will be able to transfer funds from your 529 Student Savings Plan to your child’s Roth IRA. This allows the beneficiary (child) to tax-free exchange 529 Student Savings Plan funds into a Roth IRA with a holding period of 15 years or more. It can be said that this mechanism, which allows contributions to the Roth IRA without age restrictions, will expand the range of asset formation for the future of a child.

Summary

Important points in raising children in the United States are tax incentives and education savings methods. Child tax credits and childcare expense credits provide financial support, and the 529 Student Savings Plan is gaining traction as a means of saving for a child’s education.

The Child Tax Credit (CTC) is a program that provides a tax break for families raising a child and can deduct up to $2,000 per qualifying child. Conditions for eligible child include age and support status.

Childcare expense deductions apply to single or dual-income couples who pay childcare expenses, and the amount of the deduction is based on the age of the eligible child and the expenses paid.

The 529 Student Savings Plan is a flexible investment vehicle to cover educational expenses such as college admissions, and is useful for future asset building. In addition to being used for tuition fees at public and private universities in the state, it also provides preferential treatment in terms of income tax and inheritance tax.

By taking advantage of these measures and plans, you can ease the financial burden of raising children in the United States and prepare for future educational costs.