It’s a fact: kids are expensive. From pricey baby gear to piano lessons, orthodontics to college tuition, making the choice to have children is guaranteed to cost you a fortune.
Stressed and exhausted new parents might be relieved to know, however, that along with sticky kisses, dirty diapers, and general chaos there are actually some financial pluses to having children that their carefree childless friends miss out on.
1. Tax credits & deductions
This is the one most people are at least somewhat familiar with. You might not know, though, that in addition to the standard deduction you might also qualify for the Earned Income Credit (EIC) or the Child Tax Credit, or both, depending on your income, number of children and marital status.
The Child Tax Credit is worth up to $1,000 per child under 17 years of age, and is gradually reduced based on level of income. The Earned Income Credit can generate a maximum credit of $5,666 for three children, $5,036 for two children, and $3,050 for one child. The EIC is designed for lower-income working families, so both earned and adjusted gross income are taken into account in figuring the amount of your credit.
If you pay for child care, you may also qualify for a federal tax credit of up to 35% of the cost. The Child and Dependent Care Tax Credit applies to child care for a child under age 12, or older if the child is physically or mentally unable to care for himself.
You’re not completely out of luck even after your teenager leaves the nest. If your child is in college but you are paying tuition and can claim him or her as a dependent, you can also claim one of several education deductions and credits on your tax return.
Conventional wisdom says that adoption is expensive, and with domestic adoptions averaging over $20,000 and international adoptions up to $35,000, there is no arguing the cost. However if you are planning to adopt, you can count on at least some of the expenses being recouped in the form of tax credits, subsidies, and even employer benefits.
If you adopted a child and paid out-of-pocket costs, you qualify for the federal tax credit. The amount of your credit depends on the amount you spent on the adoption and your adjusted gross income; however, if you adopt a special-needs child you can claim the entire credit of $13,170 regardless of your out-of-pocket costs. Individual states also offer varying tax credits and monthly subsidies depending on the type of adoption, as well as help with medical expenses. Some employers now offer benefits as well, including reimbursements of some adoption expenses and paid leave for new parents.
3. 529 college savings plans
Sure, college is a financial burden for parents and often their young adult children but if you plan ahead, you could save quite a bit and possibly even avoid student loans. 529 plans are state-sponsored college savings plans that allow contributions up to $300,000 a year. The money is managed by a brokerage or mutual fund company and grows tax-deferred. Distributions to pay for the beneficiary’s college costs? Tax-free. Every state now has at least one 529 plan available, with various features and benefits. You can invest in any state’s plan and the money can be used at any accredited college or university in the country. An added bonus is that you, the donor, stay in control of the funds and can even convert them for your own use (with a tax penalty, of course).
4. Dependent Care Flexible Spending Accounts
Childcare is another expense that can drain a family’s budget. Many medium-to-large employers now offer flexible spending account plans (FSAs) that allow parents to put away up to $5,000 each year, pre-tax, that can be used to pay child-care providers for your kids under 13 years old. It can’t be used for summer camps and you don’t qualify if you are a two-parent family with one parent who stays home.
Studies show fathers make more money than childless men – from 5% more and up for the same work on average, according to a 2007 Cornell University study. Unfortunately the same study showed the same is not true of women; mothers have a wage penalty of about 5% per child. So men at least might make more money if they choose to have children — which is a good thing because they’ll need to make up for what their kid’s mom is losing out on.