Tax Breaks for Parents

Julie Kiley is the vice president of High-Net-Worth Tax Planning at Northwestern Mutual.

Whether you’re just mastering diaper changes or your kids are able to drive, you don’t need us to tell you that raising kids is expensive. According to one 2023 LendingTree study, families are projected to spend $237,482 over 18 years to raise a child. The good news is that there are also some pretty attractive tax benefits related to dependent children. Certain tax credits and deductions can help you keep more money in your pocket, which is always a good thing. Here you’ll learn about the biggest tax breaks for parents.

Tax credits and tax breaks for parents

How many kids can you claim on your taxes? While you can include all your dependents on your tax return, that doesn’t mean you’ll qualify for every tax credit and deduction. Below are some of the most valuable tax breaks for parents, along with their eligibility requirements.

First, it’s important to understand the difference between a credit and a deduction:

• Tax deductions reduce your taxable income, which can indirectly decrease your tax bill—but typically the amount saved in taxes is less than the dollar amount of the deduction.

• Tax credits directly reduce your tax bill dollar for dollar. Credits usually result in a much better tax benefit than deductions.

Second, it’s important to understand the rules for claiming a child as a dependent and when you must stop doing so.

When should I stop claiming my child as a dependent?

In most cases, getting these tax benefits requires you to claim your child as a dependent on your tax return. To qualify, a child must:

• Be related to you. You can claim biological children, stepchildren, adopted children and eligible foster children as dependents. You can also claim other qualified relatives or certain members of your households as dependents, but we are focused on children here. (There are two types of dependents, called either qualifying child or qualifying dependent.)

• Meet age requirements: You can claim an eligible child who is younger than 19 at the end of the tax year. The age increases to 24 if your child is a full-time student. (There’s no age requirement for children who are permanently or totally disabled.)

• Be financially supported by you: You must be their primary source of financial support. Your child cannot have provided more than half of their own support.

• Meet residency requirements: The child must be a U.S. citizen, U.S. national, U.S. resident or resident of Mexico or Canada. In most cases, they also must live with you for more than half the year unless they are away temporarily, such as for education or medical treatment.

• Not be claimed as a dependent on another person’s tax return: If you are separated from the child’s other parent and filing an individual tax return, only one of you can claim the child as a dependent. Some parents alternate who claims the child each year, but there are special filing requirements when the noncustodial parent claims the child. Also, if your child files their own tax return to report wages or other income, they cannot claim themselves. They must check the box that someone else can claim them as a dependent (dependent of another).

• Not file a joint tax return with someone else: If your child is filing a joint tax return with their spouse, you cannot claim them as a dependent, unless they file only to claim a refund (this rare exception doesn't qualify if that child files and claims the Earned Income Credit).

Child tax credit

In 2024 and 2025, the child tax credit offers up to $2,000 per qualifying child. To be eligible, your child must:

• Be younger than 17 at the end of the tax year,

• Have a Social Security number,

• Be claimed as a dependent on your tax return (see “dependent” rules), and

• Be a U.S. citizen, U.S. resident or U.S. national.

Up to $1,700 of the child tax credit may be refundable, and the refundable portion of the child tax credit is called the Additional Child Tax Credit. That can be confusing, so here’s an example. Let’s say you have three qualifying children. Your total child tax credit is $6,000, but you owe only $5,000 in taxes for the year. You may receive that $1,000 difference as a refund, if you qualify.

On the flipside, this credit phases out for parents who make more than a certain amount. Parents with income (specifically, a modified adjusted gross income, or “MAGI”) of less than $200,000 per year ($400,000 if you’re married filing jointly) can claim the full credit. If your income is higher, the credit you receive is reduced or completely disallowed. There may also be some adjustments or limitations if you have a foreign tax credit or are subject to the alternative minimum tax, even if you are under the income limits.

While the Tax Cuts and Jobs Act increased the child tax credit from $1,000 to $2,000 per qualifying child, it’s set to expire at the end of 2025. At that point, it may revert to the original amount if the increased credit is not extended past 2025. Some states offer their own child tax credit or related dependent deductions.

Credit for Other Dependents

In 2024 and 2025, the Credit for Other Dependents is $500 if you qualify. This is a credit you might get, for example, if your dependent child is in college. It’s important to note that you cannot get both the Child Tax Credit and the Credit for Other Dependents for the same child and that the Other Dependent Credit is not refundable. Below are the qualifications for this $500 credit that you may be able to claim for eligible dependents who can't be claimed for a Child Tax Credit. Your dependent must:

• Be claimed as a dependent on your tax return,

• Have a Social Security Number, individual taxpayer ID number (known as “ITIN”) or adoption taxpayer ID number (known as “ATIN”).

Child and dependent care tax credit

If you pay for childcare, you may qualify for the child and dependent care credit if:

• You paid childcare expenses for an eligible dependent so that you could work or actively look for employment.

• You lived in the U.S. for more than half the year. (Exceptions apply for certain military personnel.)

The amount of the credit is equal to a percentage of your eligible care expenses. In 2024, you can claim 20 to 35 percent of these costs. The credit maxes out at $3,000 for one qualifying child and $6,000 for two or more.

Earned income tax credit

This credit is designed for low-income workers with children. In 2024, the earned income tax credit ranges from $4,213 to $7,830. It’s slightly higher for 2025 at $4,328 to $8,046. Below are the eligibility details for 2024 and 2025:

American opportunity tax credit and lifetime learning credit

These credits can help reduce the financial burden of getting an advanced degree, whether it’s for you, a spouse or a qualified dependent. But you can’t claim both credits for the same student in a given year—in other words, no double-dipping.

• The American opportunity tax credit: This applies to qualified education expenses for the first four years of higher education. The maximum annual credit is $2,500 per eligible student.

• Lifetime learning credit: This credit is for tuition and related expenses for an eligible student who’s enrolled in a qualified school. That can include undergraduate and graduate programs, as well as professional degree courses. You can claim this credit for as many years as you qualify, and the maximum amount is $2,000 per year.

Adoption credit

If you’re looking to grow your family through adoption, you may know that adoption costs can add up. If you’ve paid qualified expenses—such as adoption fees, attorney costs and travel expenses—you can receive a tax credit of up to $16,810. To be eligible for the full amount, your modified adjusted gross income cannot exceed $292,150.

Student loan interest deduction

If you, your spouse or a qualified dependent has student loans, you may be able to claim a tax deduction for interest paid on those balances, as long as you do not file as married filing separately. The deduction applies whether they’re federal loans or private loans; however, it’s capped at $2,500 per year. Single tax filers can claim the full deduction if their MAGI is less than $80,000. The limit is $160,000 for those filing a joint tax return.

Medical expense deduction

This can be a nice tax perk if you itemize your deductions. It applies to medical and dental expenses that were not paid for or compensated by your health insurance plan and were not paid for out of your HSA or FSA account—as long as these costs exceed 7.5 percent of your adjusted gross income. These costs could be for your own care or the care of a spouse or dependent. Not many taxpayers have sufficient after-tax, or out-of-pocket, expenses to benefit from this deduction.

Tax advantages of 529 college savings plans

Paying for college can be a huge financial weight for parents, but a 529 plan allows you to save in a tax-advantaged way. With these state-sponsored plans, your contributions may be tax deductible on your state income tax return, and money in the account will grow on a tax-deferred basis. Some states provide a credit instead of a deduction for 529 plan contributions. Earnings can also be withdrawn tax-free if the money is used to cover qualified education expenses. That includes tuition, books and more.

Other financial considerations for families

There are many tax benefits of having a child—but between saving for college, setting up custodial investment accounts and tackling estate planning needs, parents have a lot on their plates. Working with a financial advisor can be so valuable for young families. Your advisor will ask about your short- and long-term financial goals and then help you create a plan that’s aligned with your values and is designed to minimize the impact of taxes. Connect with your Northwestern Mutual financial advisor today to get started.

This publication is not intended as legal or tax advice. This information was compiled by the advanced planning attorneys of The Northwestern Mutual Life Insurance Company. It is intended solely for the information and education of Northwestern Mutual Financial Representatives, their customers, and the legal and tax advisors of those customers. It must not be used as a basis for legal or tax advice, and is not intended to be used and cannot be used to avoid any penalties that may be imposed on a taxpayer. Northwestern Mutual and its Financial Representatives do not give legal or tax advice. Taxpayers should seek advice based on their particular circumstances from an independent tax advisor. Tax and other planning developments after the original date of publication may affect these discussions.