How to Make the Most of Taxes as a Family

Filing a tax return can be a real challenge even when you’re single. Add a child or two (or more), a stepparent, and/or your spouse into the mix and you might find yourself holding your head in your hands.

Fortunately, the Internal Revenue Code is replete with provisions for parents and spouses. Coming out on top at tax time begins with an understanding of these provisions, from filing statuses to the rules of claiming a dependent. When you have sorted out these critical issues, you can determine which tax-saving credits and deductions you can claim.

“In the juggle of parenting, taxes often feel like an extra ball in the mix,” says Michael Hammelburger, CEO of The Bottom Line Group, a cost segregation firm in Baltimore, Maryland. “But you can efficiently navigate the tax terrain and potentially save both money and a few extra moments of peace in the chaos with these strategies.”

Choosing Your Filing Status

Your filing status is a pivotal component of your tax return, and it should be where you start. There are five to choose from, each with its own qualifying criteria and rules. Your choice can have a huge impact on how much you owe the Internal Revenue Service—or if the IRS owes you money via a tax refund. It also determines your standard deduction and your eligibility for other deductions and tax credits.

Married Filing Jointly

You can file a joint return with your spouse if you’re married and living together, but you can also qualify for this preferential filing status in other ways—for example, even if you’re not living with your spouse as of the last day of the tax year, but you haven’t taken certain legal steps to end your marriage. That is, there’s no divorce decree or legal separation agreement in place between you two. The IRS also makes an exception for an “interlocutory” decree—one that remains in place only while your divorce is pending and ends when it becomes final. You can still file a joint return if you one of these describes your situation.

You’ll save the most tax dollars by filing a joint return if you’re married and you qualify. This is because joint filers usually receive higher income thresholds for certain tax breaks, allowing them to deduct a hefty amount of income when calculating taxable income.

But this filing status is not without a downside. You and your spouse are each “jointly and individually liable” for any taxes due on a jointly filed return. This means you effectively become one legal entity. Even if your spouse earned all the income while you were the stay-at-home parent, you’re still legally responsible for paying the full amount of tax due on a joint return.

Also, if your spouse owes certain other debts that you’re not liable for, such as unpaid child support to another family or a tax debt from before you were married, the IRS can divert your joint tax refund to pay off those debts. From there, you can potentially file an injured spouse claim to try to recoup your share of the money, but it might be less frustrating and time-consuming to simply file a separate return if this is your situation.

Married Filing Separately

Unfortunately, the married filing separately status comes with quite a few drawbacks even if it protects you from tax and debt obligations that you don’t share with your spouse.

Claiming it will prevent you from claiming several advantageous tax credits, many of them family-oriented. These include the adoption tax credit, educational credits, and the child and dependent care tax credit (see below for more on these). On the bright side, you’re responsible for paying taxes on only your own income if you file separately. But that tax may well be more than it has to be because you’re giving up quite a few tax perks.

Head of Household

“Filing status is your tactical move,” Hammelburger says. “Head of household status can open up some advantageous tax territory if you qualify.”

But qualifying comes with a lot of interlocking rules. You must meet these qualifications:

• You must be unmarried.
• You must have paid more than 50% of the costs of maintaining your home throughout the tax year.
• You must have been supporting a qualifying individual for more than half the year.

“Unmarried” for the purposes of this status more or less means that either you’re divorced or you live apart, subject to some additional rules. The qualifying individual who lives with you can be your child or a dependent parent or relative.

The head of household filing status is meant to give single or separated individuals with dependents a financial boost. Assuming you meet all these tests, you’ll receive quite a few tax breaks. You can earn more than you could as a single individual before you move into the next-highest tax bracket, for starters. And the income limits for claiming several tax credits are more generous.

Qualifying Widow(er) with Dependent Child

The qualifying widow(er) status is also pretty tax-friendly, but it’s temporary. You can only claim it if your spouse died within the past two years, and you must have a dependent child.

In addition, you can’t have remarried and you must have paid more than half the costs of your home for yourself and your dependent child for the year, just as with the head of household status. Filing as a qualifying widow(er) allows you to claim some of the tax breaks associated with a joint return for a limited additional time.

Single Filer Status

If you’re not legally married, don’t have any dependents, or have a child who lives with you but you don’t pay more than half of the expenses, then you likely qualify for the single filer status.

In the latter position, you won’t qualify for a more beneficial tax filing status if you can’t meet that head of household living expenses rule. To get a better tax break, you might want to consider paying more than half of your household’s expenses and/or having your child move in with you if the costs don’t exceed the tax savings available to you as head of household.

Money-Saving Tax Tips for Families

Numerous tax credits become more significant based on your filing status, such as education-focused credits and those for people with children, and they’re almost invariably larger if you’re married and supporting a dependent. But they come with additional qualifying rules.

Earned Income Tax Credit

The Earned Income Tax Credit (EITC) is designed to provide some financial assistance to lower-income taxpayers, as it reduces the amount of tax owed on a dollar-for-dollar basis. There’s an earnings limit, which is dependent upon your filing status and the number of your dependents, and the amount of the credit is also determined by how many qualifying children or relatives you support.

Having a qualifying child or relative isn’t mandatory for the EITC, but you’ll be subject to more severe income restrictions if you don’t have one.

Here’s the maximum income you can earn in 2023, the year for which you’ll file a tax return in 2024:

• $17,640 (with no dependents) to $56,838 (with three or more dependents) for single, head of household, and qualifying widow(er) filers
• $24,210 (with no dependents) to $63,398 (with three or more dependents) for married taxpayers filing joint returns

The maximum credit ranges from $600 to $7,430 in tax year 2023, depending on how many dependents you claim. You must have worked and had earned income during the tax year, and you cannot have unearned investment income in excess of $11,000. But if the credit is higher than your tax liability for the year, then you may be eligible for a refund.

The EITC was more generous during the coronavirus pandemic, thanks to a temporary provision, but it returned to its pre-COVID level in 2022.

Child Tax Credit

The Child Tax Credit is tailor-made to help parents meet the expenses of raising children. You can claim a credit for each of your children, provided that they have Social Security numbers and are younger than 17 as of the last day of the tax year. They must have lived with you for more than half the year, and they cannot have paid for more than half their own support needs. You also must claim them as dependents on your tax return.

A child doesn’t necessarily have to be your natural-born offspring or legally adopted to qualify. The IRS is rather generous with this rule. Your child dependent can be your stepchild, a sibling or stepsibling, or their descendants, such as a grandchild, niece, or nephew. In some cases, foster children are even eligible.

There are income limits for this tax credit as well, but they may not prevent you from claiming it entirely. The limit—graded so that some high earners can still qualify for a partial credit—was $200,000 ($400,000 for joint filers) in the 2023 tax year, and the full credit was $2,000 per child.

The Child Tax Credit also increased during the pandemic, but has since returned to its previous level.

Child and Dependent Care Credit

The child and dependent care tax credit is designed for parents who have demanding jobs, with the goal being that it would relieve some of the sting of paying for care. If you’re married and filing a joint return, your spouse must also be unavailable due to work commitments. You’re more or less prohibited from claiming this credit if you’re married and file a separate return, unless you’re living apart from your spouse.

This credit works out to a percentage of what you paid a care provider so you can go to work. The exact percentage decreases as your income increases, and other limits apply as well. Your child must be younger than 13 at the end of the tax year. Otherwise, the IRS takes the position that they could probably take care of themselves while you were out. Of course, exceptions exist if they—or an adult dependent—are incapable of self-care.

Your care provider can’t be your spouse, the child’s other parent, your own child if they’re younger than 19, or another dependent you can claim on your tax return. And the credit applies only to work-related care. It doesn’t count if you pay a babysitter a little extra so you can make a brief stop at an event on your way home from work, for example.

This tax credit was worth a significant $8,000 during the pandemic, but has since dropped back to $3,000 as of the 2022 tax year.

And don’t overlook the possibility of setting up a flexible spending account (FSA) for your child and dependent care expenses, separate and apart from claiming a tax credit.

“If your employer offers an FSA for child and dependent care expenses, you can use pretax dollars to pay for them, which can lower your taxable income,” says Barbara Schreihans, CEO and founder of Your Tax Coach, a tax strategy firm. But you’ll definitely want to speak with a tax professional about how and if you can claim both tax breaks in a given year.

Adoption Tax Credit

The IRS also provides special breaks to adoptive parents. The provisions are twofold. They offer a tax credit for qualifying adoption expenses for eligible children, and they allow you to exclude from your income any financial assistance that your employer provides for adoption expenses. And here’s an extra perk: You can carry the credit forward into subsequent tax years if any of it is left over after erasing your tax debt in the current year.

Your adopted child must be younger than 18 at the end of the tax year or be incapable of self-care. Adopting your stepchild won’t qualify if you’re married and adopting your spouse’s child. Provisions are made for special needs children as determined by your state.

Qualifying adoption expenses include:

• Adoption fees
• Traveling costs, including meals and lodging if you must leave home for the purposes of arranging and finalizing the adoption
• Attorney fees and court costs

Some associated expenses may be eligible as well, so be sure to check with an accountant if you think you have any that might qualify.

Again, income limits apply, but they’re generous—in the $200,000-plus range.

Preparing for Tax Season

The IRS recognizes that not all parents stay married and that some never marry at all. It’s crucial that you identify which of you will be claiming your child or children if you fall into this category or if you’re married and filing separate returns.

You can’t both claim the same child and the tax credits related to them without inviting a tax audit. Have a heart-to-heart with your ex or your spouse in advance of tax season, particularly if you’re a new parent, to make sure that you’re on the same page when it comes to this issue.

The IRS does impose “tiebreaker” rules if you and your ex can’t reach an agreement. It will award the dependent child to the parent with whom the child lived most during the tax year in the event of a dispute. In rare cases where a child spent an equal amount of time with each parent, the right is awarded to the parent with the highest adjusted gross income.

The Bottom Line

Family-related tax credits can be among the most generous and the most complicated provided for under the Internal Revenue Code. They can significantly ease the cost of raising a family, but the qualifying factors can be intricate.

Consider talking with a tax professional if you think you might be able to claim any of these tax breaks. It could be worth it.