Tax season has a way of sneaking up on families, especially those juggling careers, kids, education expenses and the occasional “how did that cost so much?” moment. The good news is that the tax code offers several meaningful benefits for families. The tricky part is knowing which ones apply to your situation and how they interact with each other.
With a little planning (and fewer last-minute surprises), families can turn tax season into an opportunity to keep more of what they earn and better support long-term goals.
Dependent Care: Credits vs. Employer Benefits
Families with young children or dependents who cannot care for themselves may qualify for the Dependent Care Tax Credit. For the2025 tax year, the credit allows families to apply qualifying care expenses—up to $3,000 for one qualifying person with a maximum of $6,000 if there are two or more qualifying children/dependents—toward a tax credit that directly reduces taxes owed.
Additionally, many working families also have access to a Dependent Care Assistance Program through an employer. These programs allow employees to exclude up to $5,000 of dependent care expenses from taxable income ($2,500 if married filing separately). While employer benefits reduce the amount of expenses eligible for the tax credit, they often provide greater overall savings because Social Security and income taxes do not apply to those excluded dollars.
Choosing between the credit, the employer program or a combination of both requires careful consideration of household income, tax brackets and benefit availability.
Education Credits: Choosing the Right One
When education expenses are factored in, tax planning becomes even more nuanced.
The American Opportunity Credit is available for students in their first four years of higher education who are enrolled at least half-time in a degree or credential program. Families may receive up to $2,500 per eligible student each year, calculated as 100% of the first $2,000 of qualified expenses and 25% of the next $2,000. Up to $1,000 of this credit may be refundable, meaning a refund could be received even if no tax is owed. Income limits apply, with phase-outs beginning at higher income levels.
The Lifetime Learning Credit offers greater flexibility. It can be used for undergraduate, graduate, or professional coursework, including classes focused on career advancement or skill development—and it can be used for yourself, your spouse or a dependent. This credit equals 20% of the first $10,000 of qualified expenses, for a maximum credit of $2,000 per tax return. Unlike the American Opportunity Credit, the Lifetime Learning Credit is nonrefundable and can only reduce taxes owed.
Families cannot claim both credits for the same student in the same year, so selecting the most beneficial option depends on enrollment status, expenses incurred and household income.
Scholarships and Taxable Income: The Fine Print Matters
Scholarships often reduce education costs, but not all scholarship dollars are treated the same for tax purposes. Amounts used for tuition, required fees, books and supplies are generally tax-free. Funds allocated toward room and board, travel or optional equipment are typically taxable.
Additionally, scholarships or fellowships that require the student to perform services, such as teaching or research, are often treated as taxable compensation, even if labelled as a scholarship. Because institutions may not withhold taxes on these amounts, families should maintain detailed records to avoid unexpected tax bills.
The Kiddie Tax and Investment Income
Dependent children who receive unearned income, such as interest, dividends or capital gains, may be subject to special “kiddie tax” rules. These rules are designed to prevent families from shifting investment income to children in lower tax brackets. When applicable, unearned income above a certain threshold is taxed at the parent’s marginal tax rate rather than the child’s marginal tax rate. For 2025, this amount is $2,700.
In some cases, this income may also be subject to the net investment income tax, depending on the parent’s overall income level. As a result, even modest investment earnings in a child’s account can have broader tax implications for the household.
Families may have the option to include a child’s investment income on the parent’s tax return, which can sometimes allow for additional deductions, such as investment interest expense, if itemizing. However, this approach isn’t universally beneficial. Evaluating the net effect on the family’s overall tax picture is essential to avoid unintended consequences and ensure the strategy aligns with long-term planning goals.
Planning Ahead Pays Off
Family tax planning is rarely about a single credit or deduction. It’s about how all the pieces fit together. Income levels, benefits through work, education timing and investment strategies all influence the final outcome.
Meeting with your financial advisor and tax professional early in the year can help your family model decisions before deadlines arrive, avoid missed opportunities and reduce surprises at filing time. Thoughtful planning doesn’t eliminate taxes, but it does help put families back in control of the process.
IMPORTANT DISCLOSURES: The information provided is based on internal and external sources that are considered reliable; however, the accuracy of this information is not guaranteed. This piece is intended to provide accurate information regarding the subject matter discussed. It is made available with the understanding that Benjamin F. Edwards is not engaged in rendering legal, accounting or tax preparation services. Specific questions on taxes or legal matters as they relate to your individual situation should be directed to your tax or legal professional.