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The end of every year brings holiday parties, school performances, and last-minute shopping. But it also signals the beginning of that dreaded time –tax time. And for families on a tight budget, making sure you get every possible tax deduction is key to not having to write a big check come April. For those who qualify, these 7 tax deductions and credits will save you big time and put more money back in your pocket!

Child Tax Credit

The Child Tax Credit is one of three tax savings opportunities specifically geared towards children, and it can be a big one. In 2019, the tax credit is worth up to $2,000 per qualifying child (we’ll get into what that means in a bit) or $500 per qualifying dependent.

A tax credit reduces your tax bill dollar-for-dollar, so if you qualify, that means you’ll save $2,000 (or $500 for a qualifying dependent) directly from your tax bill. Up to $1,400 of the Child Tax Credit is refundable, meaning that if your tax bill is reduced to zero, you may be able to get a refund on the remaining amount of the credit.

So who qualifies? A qualifying child or dependent must meet all of the following criteria:

• They are a U.S. citizen, U.S. resident alien, U.S. national or a resident of Canada or Mexico
• They are16 years or younger at the end of the calendar year
• They cannot be anyone else’s qualifying child
• You provide more than 50% of the child’s financial support for the year (If more than one person provides support and no one provides at least 50%, the parties can agree on who can take the credit)
• The child does NOT file a joint tax return with someone else
• The child lived with you for more than 50% of the tax year (there are exceptions for hospitalization, incarceration, birth, death, divorce and for children who were kidnapped)

To be considered a qualifying dependent (and get the $500 credit), the following must also be true:

• The person is related to you (child, stepchild, legally adopted child, foster child or a descendent of any of those people, sibling, half sibling, stepsibling, niece or nephew, parent, grandparent, stepparent, aunt, uncle, or in-law, but NOT your foster parent)OR the person lived with you all year (with exceptions for college, incarceration, hospitalization, birth, death, divorce and kidnapped children)
• The person’s gross income for the year must be below $4,150 ($4,300 in 2020); there is an exception for people who are disabled

To qualify for the credit, your modified adjusted gross income (AGI) must be less than $400,000 for married filing jointly and $200,000 for other filers.

The Child and Dependent Care Tax Credit

This tax credit is intended to lessen the burden of child care costs. This tax credit will save you 20 to 35% of up to $3,000 in child care and similar costs (or up to $6,000 for two or more dependents), provided that they are necessary so you can work. Qualified expenses can include both physical care (like daycare) but also household expenses, such as cooking and cleaning, in some cases.

Unlike the Child Tax Credit, the Child and Dependent Care Tax Credit is NOT refundable. This means that while you can use the full amount you qualify for to reduce your tax bill, you won’t get a refund once your tax bill hits zero. Note that in order to take the credit, you must have earned income (from a job); investment or dividend income doesn’t count.

To qualify for the credit, the costs must be for children 12years old or younger, an incapacitated spouse or parent, or another dependent. There is no age limit for spouses and other dependents; however, they must be physically or mentally incapable of caring for themselves and must have lived with you for at least half the year.

Note that you must provide basic information for the care provider (name, address and taxpayer identification number). The credit is not valid for payments made to your spouse, a parent of the dependent child, a dependent you claim on your tax return, or your child who is 18 years old or younger, even if they’re not listed as a dependent on your tax return.

Dependent Care FSA

This tax benefit isn’t one you’ll find on your tax return every year. Instead, this is a benefit you’ll see come through on every paycheck. A Dependent Care FSA is a pre-tax account that enables you to pay for eligible dependent care services (such as daycare, summer camps and after school programs).

How does it work? On a regular basis (usually with each paycheck), you’ll have an amount withheld and placed into your Dependent Care FSA. This amount is not subject to payroll taxes, meaning you will save on taxes and use pre-tax amounts to pay for these care expenses.

In order to be eligible, the expenses must be for your child ages 12 or younger, for before or after school care, babysitting and nanny expenses, daycare, nursery school and preschool, or summer day camp. They can also be for care for your spouse or relative who is physically or mentally incapable of taking care of themselves, AND lives in your home.

Enrollment is through your employer, and eligible participants can contribute up to $5,000 per year.

Alimony Income

The tax reform also brought changes to how alimony is taxed. Under the old laws, alimony payments were deductible by the person who paid them, but they had to be recognized as income by the person who received them.

Under the new rules, the individual who pays alimony will not receive a tax deduction for those payments. In turn, the individual who receives the payments will not have to pay taxes on that income. This is a huge win to ex-spouses who are receiving payments post-divorce.

The rules only apply to divorces finalized after December 31, 2018. So if you divorced before then, the old rules apply.

529 Savings Plan

No parent wants to think about the cost of college, but the hard truth is, the more you prepare, the better off you (and your children) will be. One of the most popular ways to save for college is through a 529 Savings Plan, which is offered by each state that is exempt from federal taxes.

Any U.S. citizen or resident 18 years or older can open up a 529 savings plan. The beneficiary can be a child, grandchild or other younger relative; an adult can also open up a 529 plan for his or her own higher education costs. Each plan can only have one owner and one beneficiary, but each person can set up multiple 529 plans and beneficiaries can receive funds from multiple 529 plans (as long as their total balances don’t exceed maximum limits set by each state).

There are two types of 529 plans: college savings investment plans and prepaid tuition plans. Funds in college savings plans can be used to pay for expenses to any eligible institution (more on that below). Qualified expenses include tuition, books and room and board, provided the student is attending at least half time.

Funds put into a prepaid tuition plan are essentially used to “pre-pay” tuition at select institutions at the current cost. The downside to prepaid plans is that the funds are usually limited to a small number of schools (such as state-run colleges and universities), and generally may only be used for tuition and not for room, board and books. As a result, prepaid plans are less popular and many have stopped accepting new enrollees.

Funds in college savings plans must be spent towards “eligible institutions.” This includes most accredited colleges and graduate schools, professional and trade schools. Some foreign schools may qualify. And as of 2018, funds can be used to pay for private K-12 education.

Although states offer 529 plans, you don’t need to choose a plan by your state. However, one benefit to choosing an in-state plan is that you may receive a state tax break for contributions if your state has an income tax. Also keep in mind the costs and fees associated with each plan before choosing one. The College Savings Plans Network offers a tool to compare the different plans in each state (click here to access the tool).

Coverdell Education Savings Account

Saving for college is great, but what about paying for K-12 education? Coverdell Education Savings Accounts (ESAs) have you covered. Like 529 plans, contributions to ESAs are with after-tax dollars, but the distributions are not subject to tax as long as they are used for qualified education expenses.

Unlike 529 plans, however, contributions are restricted when your income is above a certain threshold (currently $149,300 for married filers). And the contribution limit is much lower –only $2,000 per year. The funds can be used for any qualified education expense, which includes from elementary through college education.

American Opportunity & Lifetime Learning Credits

The American Opportunity Tax Credit(AOTC) is a credit to offset the cost of higher education. The credit offers $2,500 per year per eligible student for the first four years of higher education, and it’s a refundable credit, so you can get up to 40% of the remaining credit paid back to you even when your tax owed is zero.

The credit is calculated as 100% of the first $2,000 of and 25% of the next $2,000 of qualified education expenses for each eligible student. The credit is limited by income; as long as your modified adjusted gross income is $160,000 or less for married filers, you will be able to claim the full credit.

An eligible student:

• Is pursuing a degree or other recognized credential
• Is enrolled at least 50% of the time for at least one academic period beginning in the tax year
• Has not finished the first 4 years of higher education at the beginning of the tax year
• Has not claimed this credit or the former Hope credit for more than 4 tax years
• Does not have a felony drug conviction

The Lifetime Learning Credit (LLC) is another option to offset the cost of education. It covers qualified tuition and other expenses for undergraduate, graduate and professional degree courses (including courses to acquire or improve job skills).

The total LLC benefit is $2,000 per year(20% of the first $10,000 of qualified expenses)and there is no limit on the number of years you can take the credit. To take the LLC, you (or the eligible student) must be enrolled in or taking courses at an eligible institution; be taking eligible courses (at the undergraduate, graduate or professional degree level) and be enrolled for at least one academic period beginning in the tax year.

Like the AOTC, the LLC is limited by income; you can’t claim the credit if your modified adjusted gross income exceeds $134,000 for married filers (as of 2018).Unlike the AOTC, the LLC is not refundable (so you can use it to reduce your tax bill but won’t get anything back once your tax bill is at zero).

There are many opportunities to reduce your Federal income tax bill through the above credits and deductions. They key is to be aware of your options, carefully track your qualified expenses and keep good documentation in the event you are audited.

Looking for a fun, yet smart, way to start saving up money as a family? Set up an Eagle Kids Savings account to start saving for your little ones today and earn Eagle Bucks along the way! Click here to set up an Eagle Kids Savings Account.