Using the personal deduction for dependent children is one of the most effective ways to legally increase your net salary. The state uses this method to provide tax relief to parents, leaving them with a larger portion of their earned money to more easily cope with the costs of upbringing and education.
The basic personal deduction is a certain fixed amount on which income tax is not paid. Every registered child on your tax card (or equivalent in Bosnia and Herzegovina) carries a certain coefficient or specified amount that is added to your basic deduction. Income tax is not calculated on this total amount! The smaller your tax burden, the higher the net paid into your account.
Note: In most systems, the coefficients or amounts grow progressively. If you have three children, your total additional deduction is the sum of the reliefs for each of them listed individually.
Competent tax authorities clearly define the conditions under which children can be your tax relief. Children are considered dependent members until the end of their regular schooling (primary school, high school, and college). However, the key limiter in many countries is their own annual receipts.
Child's Annual Receipt Limit
If your child (e.g., a student) within one year through a student contract, scholarship, or other work achieves income greater than the limit set by law, the child may lose dependent member status for that entire year! The parent then loses the right to the relief and will have to return the difference in tax they did not pay by using that relief during the year to the competent administration in the annual tax filing.
One of the most useful and important methods for family tax optimization is splitting the personal deduction for children with a partner/spouse. The relief for the same child does not have to be transferred 100% to one parent; it can be divided in any ratio, e.g., 50% - 50%, or 70% - 30%.
If the parent with whom the child is registered on the PK card has a low salary, the total personal allowance (base + children) might be higher than their Gross minus Pension. This means that the parent does not pay income tax at all, and part of their child relief is wasted because there simply isn't enough income to absorb the exemption!
Transfer the remaining unused percentage of the child relief (or whole children in percentages) to the parent who has a higher gross salary. The parent with the higher salary has high tax payments; when the deduction is applied to them, it extracts 100% utilization of the tax exemption, which effectively and drastically increases the total net income of the entire household at the end of the month.
Don't worry - if you didn't submit a fresh entry through digital services (nacionalni digitalni sustav) immediately upon birth on your tax card and your salary was based on the "old" calculation for several months, you haven't permanently lost that money. In most systems, you will be able to report the newborn child retroactively for the past year through a personal annual tax filing, and the state will return the overpaid tax directly to your bank account after processing.