“Children are a heritage from the Lord, offspring a reward from him.” — Psalm 127:3
For Texas’ faith-based community, this scripture highlights both the blessing and responsibility of raising children. However, with the rising cost of living, education expenses, and complex tax laws, many parents struggle to navigate the best ways to provide for their families while utilizing available tax-saving strategies.
This blog from PAX Financial Group explores child tax credits, FSAs for child care expenses, education savings tools, and additional education-related tax breaks to help you make wise decisions for your family.
Child Tax Credits
The Child Tax Credit (CTC) helps parents reduce their tax burden, providing a dollar-for-dollar reduction in taxes owed.
- For 2024 and 2025, the maximum Child Tax Credit is $2,000 per child under age 17 at year-end.
- The credit phases out at $400,000 in Modified Adjusted Gross Income (MAGI) for married couples filing jointly and $200,000 for single filers.
- Low- and moderate-income families may receive up to $1,700 per child as a refundable credit, even if they owe no income tax.
- A $500 nonrefundable credit is available for dependents age 17 and older, such as college-aged children or elderly relatives. This credit follows the same income phaseout thresholds as the CTC.
Texas doesn’t have a state income tax, so the Child Tax Credit applies only at the federal level. As Congress discusses changes in tax laws for parents, it’s important to stay updated on possible credit expansions.
Child Care Expenses
Dependent Care FSAs
A Dependent Care Flexible Spending Account (FSA) allows parents to set aside pre-tax dollars to pay for eligible child care expenses. These accounts are offered through employers and provide substantial tax savings.
- Parents can contribute up to $5,000 per family per year to an FSA.
- Eligible expenses include daycare, preschool, after-school programs, and summer day camps for children under 13.
- Contributions reduce taxable income, lowering federal payroll taxes.
Child and Dependent Care Tax Credit
For families without access to an FSA or those with child care expenses exceeding their FSA contributions, the Child and Dependent Care Tax Credit provides additional tax relief.
- It covers child care expenses for dependents under 13 or older children with disabilities who cannot care for themselves.
- The credit equals 20% of up to $3,000 of qualified expenses for one dependent or 20% of up to $6,000 for two or more dependents.
- For lower-income families, the credit may be as high as 35% of expenses.
- Parents can claim both an FSA and this credit but cannot use the same expenses for both.
An FSA typically provides greater tax savings for middle- and higher-income families than the Child and Dependent Care Credit. Those with marginal tax rates above 12% may benefit most from maximizing FSA contributions first.
Education Saving Strategies
529 College Savings Plans
A 529 plan allows parents, grandparents, and others to save for education with tax-free growth and tax-free withdrawals for qualified expenses. While Texas doesn’t offer state income tax deductions for contributions, these accounts still provide federal tax benefits, making them a key tool for education planning.
No federal contribution limit: However, contributions exceeding $19,000 in 2025 per donor per beneficiary may require a gift-tax filing.
Tax-free withdrawals for qualified education expenses, including tuition, fees, room and board, and supplies for college, trade schools, and apprenticeships.
Expanded uses: 529 funds can also cover:
- Up to $10,000 per year per student for K-12 private school tuition.
- Up to $10,000 in lifetime student loan repayments per borrower.
- Rollovers of unused 529 funds (up to $35,000 lifetime) into a Roth IRA for the beneficiary if the account has been open for at least 15 years.
Texas also offers a Prepaid Tuition 529 Plan, allowing families to lock in tuition rates at current prices for public colleges and universities in Texas.
Coverdell Education Savings Accounts (ESAs)
A Coverdell ESA is another tax-advantaged savings tool for education, offering more investment flexibility than a 529 plan. However, these accounts come with more restrictions:
- Annual contribution limit: $2,000 per child per year.
- Income eligibility caps: Higher earners may not qualify for an ESA. Eligibility phases out for single filers earning over $95,000 and joint filers over $190,000.
- Qualified expenses: Can be used for K-12 and higher education costs (including tuition, books, and tutoring).
Additional Education Tax Breaks for Texas Families
American Opportunity Tax Credit (AOTC)
The AOTC provides up to $2,500 per student per year for the first four years of undergraduate education. It covers tuition, books, and course-related materials but not room and board. If your tax liability is low, up to $1,000 of this credit is refundable, meaning you could receive money back even if you owe little or no taxes.
Lifetime Learning Credit (LLC)
The LLC offers up to $2,000 per tax return for undergraduate, graduate, and job training courses. Unlike the AOTC, there’s no limit on the number of years you can claim this credit. However, it is nonrefundable, meaning it only reduces your tax bill and won’t generate a refund.
Student Loan Interest Deduction
If you or your child has student loans, you may deduct up to $2,500 in annual interest payments, reducing taxable income. This deduction applies to federal and private loans and is available even if you don’t itemize deductions.
Kiddie Tax Considerations
For dependent children under 24, unearned income—such as dividends or investment gains—above $2,700 in 2025 is taxed at the parents’ rate instead of the child’s lower tax bracket. This can significantly impact families with sizable investment accounts or college savings funds.
PAX’s San Antonio Financial Advisors Are Ready To Help
PAX Financial Group, based in San Antonio, Texas, brings over a century of combined expertise, offering comprehensive financial planning—from education savings and estate planning to retirement planning in San Antonio and beyond.
As fiduciaries who uphold Judeo-Christian values, we are committed to helping you pursue your unique financial goals.
Contact us today to schedule a consultation with one of our San Antonio financial advisors.
