The United States government provides several tax credits and benefits to parents, which can offset the costs of raising children. While the government does not directly pay people to have children, these credits and benefits essentially function as financial incentives for having kids.
What are the main child tax credits and benefits in the US?
There are a few key programs that give parents tax breaks and financial assistance for having children:
- Child Tax Credit – This provides up to $2,000 per child under age 17 to help offset the costs of raising children. Parents get up to $1,400 per child refunded if the credit exceeds taxes owed.
- Earned Income Tax Credit – Families with children who have low-to-moderate incomes may get a partially refundable tax credit up to $6,728 in 2023 depending on income and number of kids.
- Dependent Care Flexible Spending Accounts – These allow parents to set aside up to $5,000 pre-tax for child care expenses.
- Head of Household Filing Status – This provides higher standard deductions and tax brackets for unmarried parents which reduces taxes.
- Child and Dependent Care Tax Credit – Families can get a credit for up to 35% of $3,000 in child care costs for one child or $6,000 for two or more children.
In addition, the federal government funds programs like CHIP, Medicaid, SNAP, WIC, and TANF that provide health coverage, food assistance, and cash aid to qualifying low income families with children.
What is the Child Tax Credit?
The Child Tax Credit (CTC) is a federal tax credit that allows parents to reduce their tax bill by up to $2,000 per child under age 17. Here are some key details about the CTC:
- The maximum credit is $2,000 per eligible child.
- The credit begins phasing out for incomes over $200,000 for single filers and $400,000 for married filing jointly.
- Up to $1,400 per child is refundable if the credit exceeds taxes owed.
- The credit has no work requirement – parents do not need earned income to claim it.
- Payments are made in advance via monthly checks or as lump sum at tax time.
The enhanced CTC was first introduced in 2021 but most of the expansions expired after 2022. There are legislative proposals to make it permanently fully refundable and higher to further offset child costs.
Who is eligible for the CTC?
To claim the CTC for a child, the child must meet the following requirements:
- Be under age 17 at the end of the tax year
- Be claimed as a dependent child by the taxpayer
- Have a valid Social Security number
- Live with the taxpayer claiming the credit for more than half the year
Adoptive parents can claim an adoption tax credit in the year the adoption is finalized. Parents who owe back child support cannot claim the CTC for that child.
How does the CTC reduce your taxes?
The Child Tax Credit directly reduces your tax liability dollar-for-dollar. Each eligible child subtracts up to $2,000 from the amount of taxes owed. For example:
- Tax liability without CTC: $5,000
- 2 kids x $2,000 credit per child = $4,000
- New tax liability after CTC: $1,000
So the $4,000 CTC saves $4,000 in taxes. If the credit exceeds taxes owed, up to $1,400 per child is refunded.
What is the Earned Income Tax Credit?
The Earned Income Tax Credit (EITC) is a refundable tax credit for low-to-moderate income workers and families. Larger credits are available to those with children. Here are some key details on the EITC:
- Maximum credit up to $6,728 for families with at least 3 children in 2023
- Completely phases out at incomes over $53,057 for families with 3 kids
- Credit ranges from $560 to $3,733 for families with 1 child
- Workers without children can get a smaller credit up to $560
The EITC is fully refundable so if it exceeds a family’s tax liability the rest is paid out as a tax refund. To qualify for the EITC parents must meet work requirements and file a tax return.
EITC Income Limits and Phaseouts
The size of the EITC depends on number of children and adjusted gross income (AGI). It phases out above certain AGIs. The income limits to qualify for 2023 are:
| Number of Children | Maximum AGI to Receive Max Credit | Income Where Credit Fully Phases Out |
| 0 children | $16,480 | $22,610 |
| 1 child | $45,622 | $53,057 |
| 2 children | $53,057 | $59,187 |
| 3 or more children | $53,057 | $53,057 |
So for example, a family with 2 children would get the maximum $6,164 credit if income is below $53,057. The credit phases out gradually and disappears when income hits $59,187.
EITC Work Requirements
To qualify for the EITC, workers must meet certain work requirements. There are three categories of eligibility:
- Worked at least 6 months – This results in the largest credit amount
- Worked less than 6 months – Results in a smaller credit
- No work requirement – For those with total disability or over age 64
Self-employed individuals and Uber/gig drivers can qualify for the EITC under the worked 6 months criteria. The credit provides a strong work incentive for low income parents.
How do Dependent Care FSAs work?
A Dependent Care Flexible Spending Account (FSA) is an employer-sponsored benefit that allows employees to set aside pre-tax dollars to pay for child care costs for children under age 13.
Some key features of Dependent Care FSAs include:
- Contribution limit is $5,000 per household annually
- Funds are excluded from income taxes
- Money is use it or lose it – expires if not used by year end
- Covers care costs for dependents under 13
- Pays for services like day care, after school programs, babysitters
Parents can use pre-tax FSA funds to be reimbursed for eligible child care expenses. This allows them to pay for child care with tax-free dollars and lower their overall taxable income.
Dependent Care FSA Eligible Expenses
Dependent Care FSAs can be used to pay for a wide variety of care services for dependents under age 13, including:
- Child care centers
- Preschool and nursery school
- Before and after school programs
- Summer day camps
- Babysitters (in your home or someone else’s home)
- Nannies
Care can be provided inside or outside the home but cannot be provided by a dependent spouse or child under age 19. Adult day care for elders does not qualify.
FSAs vs. Child Care Tax Credit
Both FSAs and the Child Care Tax Credit can help cover child care costs. Some key differences:
- FSA funds are excluded from income vs. credit reduces tax liability
- FSA contribution limit is $5,000 vs. credit limits are $3,000 for 1 child/$6,000 for 2+
- Credit rate up to 35% vs. FSA saves based on tax bracket
- FSA is use it or lose it vs. credit comes as refund at tax time
Low to moderate income families may benefit more from the credit, while FSAs provide larger tax savings for those in higher tax brackets.
How does Head of Household status help parents?
Head of Household is a special tax filing status for unmarried parents and caregivers. It provides higher standard deductions and wider tax brackets than filing as single or married filing separately.
In 2023, the Head of Household standard deduction is $20,800 vs. $13,850 for Single filers. The tax brackets are also wider, resulting in lower tax rates applied.
To qualify as Head of Household, a parent or caregiver must:
- Be unmarried on the last day of the tax year
- Pay more than half the costs of keeping up a home
- Have a qualifying person living in the home more than half the year
Qualifying persons can include a child, stepchild, foster child, sibling, or other qualifying relative. This favorable status saves unmarried parents hundreds extra dollars per year compared to filing as Single or Married Filing Separately.
Head of Household Tax Brackets
Here are the 2023 Federal Income Tax Brackets for Head of Household filers:
| Taxable Income | Tax Rate |
| $0 to $15,150 | 10% |
| $15,151 to $55,900 | 12% |
| $55,901 to $95,500 | 22% |
| $95,501 to $182,100 | 24% |
| $182,101 to $552,850 | 32% |
| Over $552,850 | 35% |
Compare this to the more compressed Single filer brackets that start at 10%, jump to 24% at just $58,375, and hit 35% at $178,150. Head of Household offers significant tax savings for unmarried parents.
Child and Dependent Care Tax Credit overview
The Child and Dependent Care Tax Credit provides a credit for child care expenses of up to 35% of $3,000 in costs for one child or $6,000 for two or more children. Key details include:
- Maximum credit percentage is 35% for under $15,000 AGI
- Credit percentage phases down to 20% for over $43,000 AGI
- Maximum credit is $1,050 for one child, $2,100 for two or more
- Covers care costs for children under age 13
- Refundable so excess paid as refund
The credit can be up to 50% if the spouse also works. To qualify, parents must have earned income, pay for qualifying care, and claim the child as a dependent. The credit can help offset the costs of child care for working parents.
Who qualifies for the credit?
To qualify for the Child and Dependent Care Credit, parents must meet the following requirements:
- Have one or more children under age 13
- Pay for child care so the parent(s) can work or look for work
- Claim the child(ren) as dependents
- Have earned income such as wages or self-employment
- Use care services that meet IRS requirements
The credit is available to married couples filing jointly as well as single and head of household filers. Care can be provided by a child care center, babysitter, relative, or other qualifying provider.
Expenses that qualify for the credit
The following child care expenses can qualify for the Dependent Care Tax Credit:
- Child care centers, preschools, nursery schools
- Before and after-school care programs
- Nannies, babysitters, in or outside the home
- Day camps, even if educational/instructional
- Transportation to and from eligible care
The expenses must enable the parent(s) to work or actively look for work. Care can take place in or outside the home. Adult dependent and long-term care costs do not qualify for this particular credit.
Conclusion
In summary, the US federal tax code includes several major credits and benefits that help American families offset the costs of raising children. While the government does not directly pay people to have children, the combined savings from the Child Tax Credit, Earned Income Credit, dependent care accounts, and other tax breaks essentially functions as an incentive program for having kids.
According to the Treasury Department, the average Child Tax Credit alone saves families $1,500 per child per year. And the value of these tax credits grows with each additional child in a family. So while the decision to start a family is highly personal, the government does provide substantial financial assistance through the tax code to help with the considerable costs.