Tax Reliefs for Dependent Children
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 relieve parents of taxes, leaving them with a larger portion of their earned money to more easily cope with the costs of upbringing and education.
What is child tax relief and how does it work?
The basic personal deduction is a certain fixed amount on which no income tax is paid. Each child registered on your tax card (or equivalent in Croatia) carries a certain coefficient or a set amount that is added to your basic deduction. No tax is calculated on this total amount! The lower your tax burden, the higher the net amount paid to your account.
Increase in relief depending on the number of children
- First child: Basic prescribed addition to the deduction
- Second child: Increased addition
- Third child: Even larger progressive addition
- Fourth and each subsequent child: Maximum prescribed additions
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 individually.
Who is considered a dependent child?
Relevant tax authorities clearly define the conditions under which children can be your tax relief. Children are considered dependent members until they finish regular schooling (primary school, high school, and college). However, the key limiter in many countries is their own annual income.
Annual child income limit
If your child (e.g., a student) earns an income higher than the legally set limit within a year through a student contract, scholarship, or other work, the child may lose the status of a dependent member for that entire stated year! The parent then loses the right to the tax relief and will have to return the difference in tax they did not pay by using that relief during the year to the competent authority in their annual tax return.
Smart sharing of tax relief between parents
One of the most useful and important methods for family tax optimization is splitting the personal deduction for children with a partner/spouse. The tax 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%.
Why and when to share the tax relief?
If the parent to whom the child is registered on the tax card has a low salary, the total personal allowance (base + children) might be higher than their Gross minus Pension Insurance. This means that this parent completely does not pay income tax, and a portion of their child tax relief goes to waste because there is simply not enough income to absorb the exemption!
Transfer the remaining unused percentage of the child tax relief (or entire children in percentages) to the parent who has a higher gross salary. The parent with a higher salary has high tax payments; when the deduction is applied to them, they get 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.
Forgot to register a child on time?
Do not worry - if you did not submit a fresh entry through digital services (e-Građani) to your tax card immediately upon birth and your salary went according to the "old" calculation for a few months, you have not permanently lost that money. In most systems, you will be able to report the newborn child retroactively for the past year through the personal annual tax return, and the state will refund the overpaid tax directly to your bank account after processing.