Raising children is one of the most expensive things in life. Fortunately for us parents, as part of the recent tax bill, the OBBBA solidified the expanded Child Tax Credit amount. In 2025, you may be eligible to receive a credit for each qualifying dependent up to $2,200. That will generally lead to another question: “Are there more deductions or credits related to my kids?” While claiming the Child Tax Credit could be table stakes, there are at least three more levels of tax planning to save on all those expenses you pay for.
Level 1 – Dependent Care Credit
If you paid someone to care for your children so you could work, you may qualify for the dependent care credit. The rough idea was that Congress wanted to help families who have to pay someone to watch their kids, specifically so they can work themselves. This means you (and your spouse) must have earned income to qualify. Assuming so, then daycare, summer camps, nannies, etc., all may qualify as expenses that could reduce your taxes.
The IRS outlines what qualifies as an expense and what does not. For example, tuition and schooling do not qualify for the credit (but after-school care may). So, work with your CPA to categorize these expenses correctly. The IRS also explains who qualifies as a care person, which, more or less, is anyone (or place) that is not your immediate family. So, no older kids, spouses, ex-spouses, etc.
Unfortunately, the level of credit is not going to rock the boat. For 2024, the maximum amount of expenses you could claim is $3,000 for one person or $6,000 for two or more. Most business owners will likely have a maximum credit of 20% of expenses, so $1,200 for at least two kids. While $1,200 isn’t going to change the entire situation, it is one more small planning step to reduce your lifetime tax bill. Over 10-15 years, that could still save you $10,000 – $15,000 in taxes. Fortunately, there is level two, which may be slightly better if it fits your situation.
Level 2 – Dependent Care Account
In typical Finance Industry fashion, there is a new account for this. It is sometimes called the Dependent Care Flexible Spending Account (FSA). Why do you want a new account for this? Because all contributions to this account are tax-deductible. Think about the HSA and 401k, money that goes in helps reduce your taxable income for the year. This account is technically another “employee benefit”, which means it needs to be opened through the company as opposed to you opening it personally.
After doing so, you can contribute up to $5,000 each year (for 2025) to the Dependent Care FSA. Assuming you max it out, those who have a higher tax rate will likely save more than if they just used the Dependent Care Credit. For example, a family that makes $200,000 may have a tax rate around 30% including state and local taxes. Using all of the $5,000 on expenses could save them about $1,500 in taxes each year. Also, since the credit maximum is $6,000 for two or more kids, you can claim the last $1,000 (net of your FSA account expenses) and add another $200 in tax savings. Continuing our example, without the account, your max savings could be $1,200, while with the account, it could be closer to $1,700.
Honestly, the savings are not too much more, but I think you would still say “thank you” if someone handed you $1,700 in cash each year. There are other advantages to having the Dependent Care Account, too. Having an account specifically for expenses can help keep you organized and up to date on the eligible expenses in the year so far. These accounts can also be great employee perks, and many business owners will fund some of the accounts for employees.
Level 3 – Pay Your Kids Directly
After leveling up this far, you may wonder what is next. For business owners with 100% ownership, it may be most suitable to hire your kids directly into the business. Instead of parents paying for the expenses of the child, money can come directly out of a kid’s bank account to pay for their own expenses. In the concept of tax planning, this may multiply the level of taxes your family could save.
This strategy may be geared towards older kids, since hiring them would require them to literally work in the company. A summer job at the company may be a great way to pay them a fair wage while providing a nice tax situation. All of the wages paid to the child will likely be tax-deductible for you and tax-free for them. For example, if you pay your kid $10,000 for a summer internship, using the 30% tax rate from before could mean saving roughly $3,000 in taxes. As long as they do not make too much money, the kids should not have any income taxes due to them personally.
This strategy would start compounding if there were multiple kids in the picture. You can imagine a scenario where 3 kids work in the business, all make $10,000 and create $3,000 in tax savings, each. Work with your accountant to see if this could apply to your situation, since there are many variables that need to be thought through beforehand. One of the most important adjustments is that for this strategy to work, you cannot claim your child as a dependent. Therefore, a game of “which strategy creates the best tax situation” starts to emerge. This is why a quality accountant and advisor are so important. For any strategy, you must judge the level of savings against the time and effort required to execute it.
From Diapers to Deductions
Ultimately, no matter what you do from a tax planning perspective will not have much effect on the actual amount of expenses related to your children. The schooling, clothes, sports, birthday parties, etc., will always be there, that is part of life. But when organized, there can be ways to save considerable amounts of money just by being intentional with these expenses. There are always different levels of difficulty (and reward), so focus on what you are willing and able to do and get professionals around you to help.
TC Falkner 