Got your kid tax credits?

Tax season is upon us!  Have you consider how your kids may positively impact your tax return?

Tax software used by professionals and do-it-yourself folks helps us keep the tax to the lowest amount we legitimately owe.

The key to preparing tax returns is to understand the rules and sometimes more importantly the software.  A check mark in the wrong spot or a question improperly answered can lead to a major tax issue.  Other times, it is a matter of record keeping and if we don’t have the documentation it is easier to take the easy route and just pay more money.

Methods to reduce income taxes boil down to two ways—reduce taxable income and increase the use of tax credits.  Credits are the more favorable method as they reduce taxes dollar for dollar.  Reducing taxable income through deductions (like mortgage interest) and exemptions reduces your overall tax.  This post will address credits related to having dependent children.

There are number of kid related credits that are available.   Each has very specific rules, such as income limitations.

Child Tax Credit 

This credit is one of the simplest.  This credit provides $1000 credit per child under 17 years of age.  For 2013 tax returns, the credit for married couples decreases for incomes above $110,000.  It shrinks for single or head of household filers with income above $75,000.  In some circumstances, a taxpayer may receive part of this credit as a refund titled Additional Child Tax Credit.

Child and Dependent Care Credit

Congress recognizes that parents need to work in order to support their family.  They created this credit to help offset the cost of our loved ones care.  The credit amount varies by income range.  Most folks max out at the smallest of 20% of expenses or $600.  The care credit is generally for dependent children under 13 years of age unless there is a disability.  All parents must work to maximize the credit.  In a married situation, if one of the parents doesn’t have employment the credit will not apply.

Education Credits

The Lifetime Learning Credit (LLC) and American Opportunity Credit (AOC) apply to college education.  The AOC is the more favorable of the two credits.  The AOC is worth up to $2500 per student on the first $4000 of expenses.  The AOC is for the first four years of undergraduate education.  Married couples have income limitations starting at $160,000.  The Lifetime Learning Credit is 20% of up to $10,000 of expenses.  There is a limit of $2000 per return.  The LLC is for undergraduate or graduate school use.  Income limitations start at $108,000 for married couples.  Families may use both credits in the same year for different students.  For example, a family has one child in undergraduate and another in grad school.  They can use the AOC for the undergrad and the LLC for the child in a graduate program.  Both children must be eligible as dependents for the parents to receive the credits.

Adoption Credits

Many parents add kids to the family through adoption.   Adoption can be a very long and expense process.  The Adoption Tax Credit is in the tax code to help reduce the expense.  In 2014, the credit is worth up to $13,190.  It reduces to zero for incomes above $197,880.  The credit applies to adoption fees, attorney fees, travel expenses, and court costs for children under 18.  The credit does not apply for adoption of a as step child.  Benefits received from an employer or governmental unit are not eligible.  In some cases, this valuable credit maybe more than the amount of taxes due.  In this case, the taxpayer can carry the credit forward for use in the next five years.

Earned Income Credit

The Earned Income Credit provides a helping hand to lower income individuals and families.  The benefits of this credit vary based upon filings status (e.g., married vs. single), income, and number of children.  The top income level for a married couple with one child is $43,210 (2013 Tax Return) and $51,567 for a three child family.   Unfortunately, there is a lot of abuse of this credit and the IRS compliance rules are very stringent.  These rules include how a child qualifies, limits on investment income, and what defines income.   This requires a professional tax preparer or an in depth review effort to avoid a misstep.

For those who prepare their own returns, the IRS website is a great place to start when researching tax issues.  I recommend as a place to start in researching your particular situation.

Many folks decide to turn their tax chore over to a professionals such as Enrolled Agents and CPAs.  If you are interest or want more information on one the credits ask your tax professional to help you out.

 Note: During tax season I am very busy and only have room for a limited number of new planning clients.

IRS Circular 230 Disclaimer:  To ensure compliance with requirements imposed by the U.S. Internal Revenue Service, any tax advice contained in this website is not intended or written to be used, and cannot be used for the purpose of avoiding tax-related penalties under the U.S. Internal Revenue Code or promoting, marketing or recommending to another party any tax-related matters addressed herein.

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