According to an annual report prepared by the United States Department of Agriculture, the annual cost of raising a child through the age of 17 is between $12,290 and $14,320 for middle- income families who make between $59,410 and $102,870 before taxes. Unfortunately, parents will see the costs of raising kids creep even higher if Congress and President Obama don't reach a resolution on some child-rearing related tax benefits set to expire in 2012. Here are four key tax breaks that benefit parents nearing expiration and what it means to your wallet if they do.
1. Child Tax Credit (CTC)
Originally part of the Bush-era tax policy, President Obama extended this tax credit, which is currently as much as $1,000 per qualifying child depending on income, as part of fiscal relief efforts in 2010. This tax credit includes birth, step and adopted children, grandchildren, nieces and nephews who are under the age of 17 and claimed by the taxpayer). If the current credit isn't renewed by year end, the maximum possible credit will reduce to $500 in 2013, and limit the potential refund to families with three or more or children. Because the credit is structured as an income-based phase-out beginning at $110,000 for married taxpayers filing a joint return, $55,000 for married couples filing separately, and $75,000 for all other taxpayers) families that make less than those limits and have fewer than three children will feel the pain of this tax credit the most.
2. Dependent Care Tax Credit
According to the "Child Care Aware of America's Parents and the High Cost of Child Care: 2012 Report," annual costs for infant child care in a child care center increased 2% this year; care for children aged four years in a child care center increased 4.2%. For many families, that amounts to annual child care costs ranging from $3,500 to more than $15,000. Those families could see their costs rise even further, thanks to the dependent care tax credit, which is slated to expire at year-end. Currently, it allows working parents (or unemployed parents looking for work) to claim up to 35% of child care-related expenses as a credit, up to $6,000. Like the CTC, it is structured to benefit lower income families the most. If it isn't renewed before 2013, the maximum amount that can be claimed will lower to $4,800 per family.
3. Earned Income Tax Credit (EITC)
The EITC is a refundable federal income tax credit intended to reduce tax burdens of low income workers and essentially results in a tax refund for those who qualify, if the EITC exceeds the amount of taxes owed. The phase-out thresholds for income levels have changed over the years since the credit originated in 1975, but if not renewed the current maximum credit amount of 45%, will decrease to 40%. Families with low incomes and more than three children could owe up to $600 more in taxes as a result of the change.
4. The American Opportunity and Lifetime Learning Credits
These tax credits were introduced by President Obama in 2009 to make college and lifelong learning more accessible. The credits allow families to choose which credit is most beneficial based on income, the student and the program attended. Currently, the American Opportunity credit allows students (or parents who claim the students as dependents and pay for their college) to claim up $2,500 per student for four years of post-secondary education. Because the credit is 40% refundable, it may result in a refund of up to $1,000 for lower income earners who have no tax liability. The Lifetime Learning Credit has a cap of $2,000, or 20% of the first $10,000 paid for eligible education expenses but is free of some of the restrictions that the American Opportunity credit entails. If the credits aren't renewed, the Hope Credit will come back to life, effectively reducing the maximum credit amount to just $1,800 and the duration it can be claimed to just two years.
The Bottom Line
According to the Tax Policy Center's Senior Research Associate Elaine Maag, nearly three-quarters of all families with children will either see their taxes rise, or net rebates decline, by an average of almost $1,200 in 2013, if the current tax credits that benefit families expire. That number is in addition to the broader tax hikes that 2013 will present.