Child related tax credits, exemptions, and deductions.
Remember the old saying, “The apple doesn’t fall far from the tree?” It sure would be nice if the apples were replaced with crisp one-hundred dollar bills. Although state and federal laws, and hopefully your ethical and moral compass, prevent the actual selling of your child for cold hard cash, Congress does provide a number of important child related credits, exemptions, and deductions that a parent or guardian can use to put money back in their pockets.
First, what is the difference between a credit, exemption, and deduction? Credits reduce 100% of the amount of tax owed; exemptions are multiplied by a fixed amount to arrive at a number to reduce income; and deductions reduce the amount of income, so that less tax is paid based on the tax rate. I will explore some of the more common, yet often forgotten and overlooked child related credits, exemptions and deductions.
The Earned Income Tax Credit (EITC)
A refundable Earned Income Tax Credit (EITC) is available to certain income eligible individuals with at least one eligible child living with them more than one-half of the year. The amount of the credit increases until your income reaches a maximum amount. Then the credit decreases and is eventually phased completely out. A refundable credit means the credit is not limited by the taxpayer’s tax liability. This means Uncle Sam will put money directly in your pocket if the EITC is more than the amount the taxpayer owes to the IRS.
To claim the EITC, a child must be deemed an eligible child. An eligible child is the taxpayer’s son, daughter, stepchild, adopted child, foster child, brother, sister, half-brother, half-sister, step-brother, step-sister, or descendent of any of the above. Therefore, a fairly wide net is being cast.
For the 2010 taxable year, you will begin to receive the maximum EITC amount when your income is $8,970.00 with one qualifying child, and $12,590.00 with two or more qualifying children. The maximum credit equals $3,050.00 with one child; $5,036.00 with two children; and $5,666.00 with three or more children. Once your income reaches $16,450.00 ($21,450.00 if married filing jointly), the EITC begins slowly decreasing until phased out completely when your income is $43,350.00 with three or more qualifying children ($48,362.00 if married filing jointly).
Among the most common child related tax benefits is the exemption for dependent children. You are allowed one exemption for each qualifying dependent; such as a son, daughter, stepchildren, or descendents of the above. Since exemptions reduce your taxable income, you can deduct $3,650.00 for each exemption you claim for the 2010 taxable year.
Child Tax Credit
Do you feel like it is already too good to be true? Well, if you have one or more qualifying dependent children, you may be entitled to a Child Tax Credit of $1,000.00 for each child. The savings only last through 2010, because the credit is reduced to $500.00 for each child for the 2011 taxable year. The qualifying child must be under the age of 17 at the end of 2010, you must have provided more than one-half of the qualifying child’s support during the year, and you claimed them as a dependent.
Child and Dependent Care Credit
There’s even more! There is also a nonrefundable credit for a portion of qualifying child or dependent care expenses paid by you for being employed. You heard me right: The government is rewarding parents for having a job. To be eligible, you must incur employment-related expenses in providing care for a qualifying individual. A qualifying individual includes dependent children under the age of 13 and mentally or physically disabled dependents who are unable to care for themselves.
The credit may be applied to qualifying expenses equaling $3,000.00 for one dependent, and $6,000.00 for two or more dependents. The credit amount is equal to an applicable percentage, determined by your adjusted gross income, and multiplied by the amount of expenses. The credit, equal to 35%, is reduced when your income exceeds $15,000.00. If your income is $43,000.00 or greater, your credit may equal 20% of the qualified expenses.
Medical and Dental Expense Deductions for Dependents
Last, but not least, are the medical and dental deductions for children and dependents. Each one of us struggles with the cost of health care, so Congress thought they would lend a helping hand. An itemized deduction is allowed on expenses paid during the 2010 taxable year for your medical care, as well as the medical care of your spouse and dependents to the extent that the expenses exceed 7.5% of your Adjusted Gross Income.
Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease. They include payments for legal medical services rendered by physicians, surgeons, dentists, and other medical practitioners.
Children are an expensive blessing. Contact a tax professional if you think you are eligible to take advantage of these and other tax credits, exemptions, and deductions. In these tough economic times, we all need to look for opportunities to put more money in our pockets.
This article is not intended, or written, to be used, and it may not be used, for (i) the purpose of avoiding any penalties that may be imposed on you or any other person or entity under the Internal Revenue Code or (ii) promoting or marketing to another party any transaction or matter addressed in this article. The Internal Revenue Codes and Regulations may have changed since the authoring of this article. Please review all updated Regulations and Codes and seek the advice of a Tax Professional.