At tax time, being a parent comes with certain perks. For example:
- The Child Tax Credit offers up to $1,000 per qualifying child. Qualification criteria include being under the age of 17 at the end of the tax year, being claimed as your dependent, and living with you for more than half of the year. (Learn more here from the IRS [PDF file, Adobe Acrobat required].)
- The Child and Dependent Care Credit can be very valuable, if you and your child qualify. It’s designed to offset some of the cost of paying someone to care for your child so that you can work (or look for work) and amounts to up to 35% of your qualifying expenses. The child must be younger than 13 when the care is provided, and the caregiver cannot be the child’s other parent. Income restrictions apply, too, along with other rules. Note, too, that this credit is available if you pay someone to care for a non-child dependent, too, such as an elderly parent. (Learn more here.)
- The Earned Income Tax Credit can be a great help to low-income working folks — but it looks so complicated and intimidating that many never take advantage of it. It’s estimated that one-fifth of eligible taxpayers don’t claim it, and among those who do, the average value is $2,200. You don’t even need children to qualify, though the credit’s maximum value rises along with the number of children you have. (Learn more.)
The tax credits mentioned above are available to both single and married parents. It’s important to make that distinction, because while single parents have many of the same breaks as married parents, there are some they miss out on.
Singling Out Singles
Single parents are not an insignificant portion of our population. In 2009, they numbered nearly 12 million, and in 2011, 27% of all American children lived with just one parent.
If you’re a single parent and you’re filing tax returns as “Single,” you should consider switching to “Head of Household” status, as it can reduce your taxes. The standard deduction is higher for heads of households, for example. Some of the criteria to qualify for the status include your providing more than 50% of the financial support for your household and your children having lived with you for more than 50% of the year.
Heads of households in 2011 can apply exemptions of $3,700 for themselves and each qualifying child against their taxable income. Have two kids? That’s a total of $11,100 by which you may be able to reduce your taxable income. (Note that this exemption is available once per child, so two parents living separately may not each claim it.)
In plenty of ways when it comes to the tax code, single parents get what they might reasonably see as a raw deal.
Consider, for example, the home sale exclusion. It offers a person the chance to exclude up to $250,000 of the qualifying gain from the sale of a home from taxes. That’s potentially a huge tax break, and for married couples, it’s doubled to a $500,000 exclusion. But a single parent, who might head a household of three or four or more people — more individuals than a childless married couple — can still only enjoy a $250,000 exclusion, at most.
There are also many smaller items that can really add up. Consider, for example, that you can “phase out” of being eligible for many credits and deductions as your income rises. The limits for married couples filing jointly are generally far higher than for singles and heads of households, even though single parents may be supporting bigger families and have very similar expenses to married couples, without the common benefit of a double income. Of course, there can be pluses along with minuses. A single filer with a lower income than a married couple can end up with a higher dependent credit, for instance.
While the tax system may not seem completely fair, it’s what we’re stuck with until changes are made. No matter what your tax status is, take a little time to make sure that you’re taking advantage of all the breaks available to you. It might even be worth spending a little money to hire a tax pro, if he or she can save you a lot of money.
Longtime Motley Fool contributor Selena Maranjian holds no position in any company mentioned. Click here to see her holdings and a short bio. You can follow Selena on Twitter: @SelenaMaranjian.