Children and Taxes Part II

Child Tax Credit

When it comes to Federal taxes, having a child can provide several automatic tax benefits. The first is an additional personal exemption of $3,950 for 2014. A personal exemption is a deduction that reduces taxable income. The second is the child tax credit. Credits are better than deductions in that they directly offset tax liability, dollar for dollar. The child tax credit is $1,000 for every qualifying child under age 17. A qualifying child for the credit has to meet the following criteria:

  • Is a direct descendent (child, stepchild, niece, nephew or grandchild)
  • Has lived in the same residence with the taxpayer for more than half the year
  • Is claimed on the tax return as a dependent
  • Does not provide more than half their financial support

Generally most children qualify based on the above criteria and it is the next requirement that most individuals or couples fail to pass. Taxpayers start to lose the benefit of the credit at $75,000 of adjusted gross income for single taxpayers and $110,000 for married filers. With dual income households, this credit is quickly reduced or diminished for a lot of clients. However there is another child credit that is not phased out by income and only requires that both spouses work during part or all of the year.

Dependent Care Credit

In the next month or so schools will be letting out for summer! Depending on the home situation this can mean increased child care costs for parents. The dependent care credit can range from 20%-35% of qualifying expenses ($3,000 for one child and $6,000 for more than one child) depending on income levels. Here is how to qualify:

  • The dependent must be a child age 12 or younger when the care is provided or be physically or mentally incapable of caring for themselves.
  • Both spouses must be working and deductible expenses can be capped if either spouse’s income is below the expenses paid or threshold for deduction above.
  • To claim the credit a couple must file a joint return for the year if married. Other filing statuses that qualify are single and head of household.
  • Qualifying expenses are reduced by any dependent care benefits provide by an employer.
  • Care must be provided by someone other than your spouse or a dependent of you or your spouse. If the care is provided by an individual, taxpayers are required to file a Form 1099-MISC to report amounts paid that individual to qualify to take the credit. We can help with this! This is a simple form that requires the name, address and social security number of the person that amounts were paid to. This is why we recommend getting this information upfront before paying someone for childcare.

Although the above deduction and credit provides a small benefit compared to the total cost of caring for a child, it is important to us that our clients take advantage of every tax benefit the IRS allows!