We’re nearing the end of tax season and kids play a big part of your bottom line. Whether they’re newborns or away at college, there are tax considerations that come with having children. In this post we’ll look at a few of the provisions of the tax code that applies to children, but by all means consult a tax specialist if you have questions concerning your particular situation.
First of all you want to make sure that your child qualifies as a dependent for your tax purposes. If you are still married to your child’s other parent and they are under 18, then the answer is likely yes. Once they move on to college, the answer can still be yes as long as you continue to provide for more than half of their support. If you are divorced, then your divorce decree may spell out which parent claims the child for taxes.
A child can only be claimed on one income tax return every year as a dependent. As was mentioned above, in divorce situations where the agreement does not specify the tax situation, only one parent can claim the child. And, if your child is off at college but has income, they cannot claim themselves if you have claimed them on your taxes. Be sure that you have these conversations to stay out of trouble with the IRS.
The most common component to your taxes regarding children is generally the exemption that you get for having a child. The exemption amount per person for the 2011 tax year is $3,700. Right off the bat, this saves you $925 in taxes if you are in the 25% tax bracket.
You can get credit for hiring child care in order for you to work. If you pay someone to care for your children under age 13 while you work or look for work, those expenses can be claimed as a tax credit. To claim this credit, you must identify the persons or organization that you paid to watch your children, but this credit can result in up to 35% of your work-related expenses being credited to your taxes. Certain rules, conditions, and restrictions apply so be sure to check with your tax professional
There is also the child tax credit. As opposed to an exemption which merely lowers your taxable income, a credit is a dollar-for-dollar reduction in the amount of taxes that you owe. For the 2011 tax year the maximum is $1,000 per child, and there is a provision to file for an additional child tax credit if you do not receive the maximum amount of credit per child. There is an income limitation for claiming this credit based on your filing status, so not everyone is eligible.
For a child with income, there are certain limits above which they are required to file an income tax return as well. Those limits are based on the types of income, whether earned, unearned, or a mix of both. For income below these amounts, the parent may be required to file the child’s income on their tax form, particularly for certain types of investment income. Even if your child is not required to file, it might be beneficial for them to do so in order to claim a refund on any income taxes paid in during the year from working.
For educational expenses, two types of credit are available for 2011 - the Lifetime Learning Credit (LLC) and American Opportunity Credit (AOC). The AOC can only be claimed for the first four years of education and creates a credit of up to $2,500. The LLC, on the other hand, is up to $2,000 per year and there is no limit on the number of years it can be claimed. You cannot claim both during the same year, but these are also a direct credit against the taxes that are owed. Conditions apply so be sure you understand the rules for claiming these credits.
Tuition and fees can be deducted from your taxable income as well, but again there are income limits. The IRS also restricts you from taking this deduction and either of the two credits mentioned previously, but if your situation does not allow you to take those credits then this might be your only option.
For your high-achieving students, any scholarship money awarded in excess of the qualified educational expenses incurred is treated as taxable income. Please note that room and board for a child away at school is not considered a qualified educational expense. The excess income might be claimed by the child or it may need to be claimed by the parent, depending on the situation. The excess amount will be reflected on the form 1098-T that your child receives at the end of the tax year.
Taxes are confusing, but having children in the mix generally brings a lot of benefit to your tax situation. Be sure that you don’t overlook any of these credits or deductions as you file your taxes.
The information contained in this post is to be used strictly as a guide and is not meant to convey professional tax or accounting advice. Consult your tax professional for more information. Also, the following IRS publications are the primary guides that address children and the tax situations described above:
Publication 929 – Tax Rules for Children and Dependents
Publication 17 – Your Federal Income Tax
Publication 972 – Child Tax Credit
Publication 970 – Tax Benefits for Education
